I. The history of monetary cooperation

(a) The European monetary system (EMS)

In 1971, the United States decided to abolish the fixed link between the dollar and the official price of gold, which had ensured global monetary stability after World War Two. This put an end to the system of fixed exchange rates. With a view to setting up their own monetary union, EU countries decided to prevent exchange fluctuations of more than 2.25 % between the European currencies by means of concerted intervention on currency markets.

This led to the creation of the European monetary system (EMS) which came into operation in March 1979. It had three main features:

• a reference currency called the ecu: this was a ‘basket’ made up of the currencies of all the member states;
• an exchange rate mechanism: each currency had an exchange rate linked to the ecu; bilateral exchange rates were allowed to fluctuate within a band of 2.25 %;
• a credit mechanism: each country transferred 20 % of its currency and gold reserves to a joint fund.

Ljubljana’s market traders swapped the Slovenian tolar for the euro
on 1 January 2007.

(b) From the EMS to EMU

The EMS had a chequered history. Following the reunification of Germany and renewed currency pressures within Europe, the Italian lira and pound sterling left the EMS in 1992. In August 1993, the EMS countries decided to temporarily widen the bands to 15 %. Meanwhile, to prevent wide currency fluctuations among EU currencies and to eliminate competitive devaluations, EU governments had decided to relaunch the drive to full monetary union and to introduce a single currency.

At the European Council in Madrid in June 1989, EU leaders adopted a three-stage plan for economic and monetary union. This plan became part of the Maastricht Treaty on European Union adopted by the European Council in December 1991.

The second stage began on 1 January 1994. It provided for:

• establishing the European Monetary Institute (EMI) in Frankfurt; the EMI was made up of the governors of the central banks of the EU countries;
• independence of national central banks;
• rules to curb national budget deficits.

The third stage was the birth of the euro.On 1 January 1999, 11 countries adopted the euro, which thus became the common currency of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. (Greece joined them on 1 January 2001). From this point onwards, the European Central Bank took over from the EMI and became responsible for monetary policy, which is defined and implemented in euro.

Euro notes and coins were issued on 1 January 2002 in these 12 euro-area countries. National currencies were withdrawn from circulation two months later. Since then, only the euro has been legal tender for all cash and bank transactions in the euro-area countries, which represent more than two thirds of the EU population.

(b) The convergence criteria

Each EU country must meet the five convergence criteria in order to go to the third stage. They are:

• price stability: the rate of inflation may not exceed the average rates of inflation of the three member states with the lowest inflation by more than 1.5 %;
• inflation: long-term interest rates may not vary by more than 2 % in relation to the average interest rates of the three member states with the lowest inflation;
• deficits: national budget deficits must be below 3 % of GDP;
• public debt: this may not exceed 60 % of GDP;
• exchange rate stability: exchange rates must have remained within the authorised margin of fluctuation for the previous two years.

The euro: the common currency for over 310 million people in the EU.

(c) The Stability and Growth Pact

In June 1997, the European Council adopted a Stability and Growth Pact. This was a permanent commitment to budgetary stability, and made it possible for penalties to be imposed on any country in the euro area whose budget deficit exceeded 3 %. The Pact was subsequently judged to be too strict and was reformed in March 2005.

(d) The Eurogroup

The Eurogroup is the informal body where the finance ministers of the euro-area countries meet. The aim of these meetings is to ensure better coordination of economic policies, monitor the budgetary and financial policies of the euro-area countries and represent the euro in international monetary forums.

(e) The new member states and EMU

New EU members are all due to adopt the euro, when they are able to meet the criteria. Slovenia was the first of countries from the 2004 enlargement to do so and it joined the euro area on 1 January 2007, followed by Cyprus and Malta a year later.