European Union (883 words) Essay

European Union
managed exchange rate system deals with trade rate between countries. Managed
rates assume that one country sets the monetary policy, takes the exchange rate
that is given, and assumes the other country will go along with that rate. The
other country then tries to reduce inflation by setting their own exchange rate.

The managed exchange rate system slows down exchange-rate movement through the
foreign trade market intervention. The whole purpose behind the European Union
is to maintain peace between the European counties, and to integrate them. The
founding gentlemen of the EMS wanted to restore the integration of the European
Communities. In 1949, the Council of Europe was founder to promote political and
social unity in Europe. Later in 1952, the European Coal and Steel Community was
started to “allay fears of a ?military-industrial complex’ fuelling
renascent German nationalism” (Artis & Lee 5). Economic integration and
unity was brought to a head in March of 1957 when the European Economic
Community and the European Atomic Energy Community were formed. These two
treaties were used to help stabilize and form the ECU. All three of these
organizations/treaties were essential to forming what is today called the
European Union. The European Union/European Monetary System failed for three
basic reasons in the early 1990’s. First of all, it failed because it was
inefficient due to the low-inflation system and the recession in that time
period. The recession elaborated on the conflicts between the member countries
of the European Union. Second, it is not sufficiently competitive at the current
rate of exchange. Third, the real interest rate of the world would need to
decline drastically in order for the EU to work. Also in the early 1990’s
there were “smaller expectations of devaluations” (DeGrauwe 131). The
current European Union has been a result of recent treaties. The first treaty
that was signed in February 1992 helped the unification of Europe be that much
closer. It set the groundwork for one currency throughout Europe called the
euro. In order to update the current treaties the Amsterdam Treaty was signed as
a result of the Intergovernmental Conference. This treaty resulted in a plan to
listen to the citizens, get closer to a more secure Europe, to make Europe more
vocal throughout the world, and to make the European Union more efficient. As of
January of 1997 there were 15 countries belonging to the regional and economic
European Union. The countries currently involved are Austria, Belgium, Denmark,
Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal,
Spain, Sweden, and the United Kingdom. In the future the European Union hopes to
grow and add more countries to this list. The banking system that the European
Union uses is a Central Banking System. With the evolvement of the Euro the
economics of Europe will be easier to maintain. As of January 1, 1999 the
national central banks and the European Central Bank were formed to help
institute the monetary policy using the euro. The macroeconomics theory
accompanied with the use of economic analysis can illustrate the ideas behind
the EMS. The members of the EU have put a strong emphasis into the monetary and
macroeconomic policies. In order to “reduce inflation the tried to have more
stable competitive conditions within in the EMS which resulted in strict
exchange rates” (Levich & Sommariva 5). The European Union has a long way
to go before it achieves 100% success. It is updated basically on a year-to-year
basis. In order to continue to improve the Union they have established an Agenda
2000. This agenda presents the major problems that they will encounter as the
year 2000 is approached. First, they want to strengthen and reform the Community
policies to deal with a growing European Union. Second, they need to look at the
other countries that have applied to be a part of the Union. Last, a budget
needs to be established that includes all of their future plans. There are many
advantages to having a united Europe to the people of Europe. One benefit is
trade. There is now a free movement of goods, services, people and, money within
the countries belonging to the European Union. Having a united Europe, which
will result in the euro, will benefit information technology, administrative
changes, and the information and training of employees. The benefits of the EU
on citizens, businesses, and tourists will be determined by how much attention
is paid by each particular country to maintaining and promoting good relations
with one another. (Sumner & Zis 249) American businesses are affect by the
united Europe. For example, in 1980-85 there was an unpredicted increase in the
value of the dollar. As a result of the dollar appreciation many American
industrial firms that competed in the international market were more profitable
than in the past. The European Union also affects the business in the United
States because the “cash forward market liquidity tends to ?dry up'” in
the middle of the afternoon because that is when the European currency traders
are going home for the day (Levich &Sommariva 95). Investors in the ECU are
growing on a daily basis. Investors tend look at the Union as a risk-returning
investment according to dollar assets and the foreign alternatives that are

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DeGrauwe, Paul. The Economics of Monetary Integration. Oxford: Oxford
University Press, 1994. Giavazzi, Francesco, Stefano Micossi, and Marcus Miller.

The European Monetary System. Cambridge: Cambridge University Press, 1988.

Levich, Richard M., and Andrea Sommariva. The ECU Market: Current Developments
and Future Prospects of the European Currency Unit. Lexington: Lexington Books,
1987. Sumner, M.T., and G. Zis. European Monetary Union: Progress and Prospects.

New York: St. Martin’s Press, 1982.


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