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The Economic and Monetary Union (EMU) is an umbrella term for the group of policies aimed at converging the economies of all members of the European Union at three stages. Both the 17 eurozone states and the 10 non-euro states are EMU members. A Member State however needs to comply and be a part of the "third EMU stage", before being able to adopt the euro currency; and as such the "third EMU stage" has also become largely synonymous with the eurozone.
All Member States of the European Union, except Denmark and the United Kingdom, have committed themselves by treaty to join the "third EMU stage". The Copenhagen criteria is the current set of conditions of entry for new states wanting to join the EU. It contains the requirements that need to be fulfilled and the time framework within which this must be done, in order for a country to join the monetary union. An important element of this, is a participation for minimum two years in the European Exchange Rate Mechanism ("ERM II"), in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro.
Seventeen member states of the European Union, including, most recently, Estonia, have entered the "third EMU stage" and have adopted the euro as their currency. Denmark, Latvia and Lithuania are the current participants in the Exchange Rate Mechanism (ERM II). Denmark and United Kingdom has received a special opt out from the EU Treaty, allowing for a permanent membership of ERM II, without being required to enter into the "third EMU stage". Latvia and Lithuania have yet to comply with all convergence criteria to proceed into the third stage. In regards of the remaining 6 non-euro Member States (Sweden, Poland, Czech Republic, Hungary, Romania and Bulgaria), they are committed by treaty to enter the third stage upon the time of complying with all convergence criteria; of which the last one (ERM II membership) however is something the Member State can choose not to apply for, if they do not want to adopt the euro. The 10 non-euro EU Member States will continue to use their own local and historic currencies.
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First ideas of an economic and monetary union in Europe were raised well before establishing the European Communities. For example, already in the League of Nations, Gustav Stresemann asked in 1929 for a European currency against the background of an increased economic division due to a number of new nation states in Europe after WWI.
A first attempt to create an economic and monetary union between the members of the European Communities goes back to an initiative by the European Commission in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation," which was followed by the decision of the Heads of State or Government at their summit meeting in The Hague in 1969 to draw up a plan by stages with a view to creating an economic and monetary union by the end of the 1970s.
On the basis of various previous proposals, an expert group chaired by Luxembourg’s Prime Minister and Finance Minister, Pierre Werner, presented in October 1970 the first commonly agreed blueprint to create an economic and monetary union in three stages (Werner plan). The project experienced serious setbacks from the crises arising from the non-convertibility of the US dollar into gold in August 1971 (i.e., the collapse of the Bretton Woods System) and from rising oil prices in 1972. An attempt to limit the fluctations of European currencies, using a snake in the tunnel, failed.
The debate on EMU was fully re-launched at the Hannover Summit in June 1988, when an ad hoc committee (Delors Committee) of the central bank governors of the twelve member states, chaired by the President of the European Commission, Jacques Delors, was asked to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union. This way of working was derived from the Spaak method.
The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions like the European System of Central Banks (ESCB), which would become responsible for formulating and implementing monetary policy.
The three stages for the implementation of the EMU were the following:
Since membership of the eurozone establishes a single monetary policy, individual member states can no longer act independently, preventing them from printing money in order to pay creditors and ease their risk of default. By "printing money" a country's currency is devalued relative to its (eurozone) trading partners, making its exports cheaper, in principle leading to an improved balance of trade, increased GDP and higher tax revenues in nominal terms.
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