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Third stage of Economic and Monetary Union
The third stage of Economic and Monetary Union (EMU) is the introduction of the euro and the implementation of a common monetary policy in the European Union Member States. The transition to the third stage of EMU is being carried out gradually. Certain Member States have not yet fulfilled the economic and legal conditions to proceed to the third stage.
Economic and Monetary Union (EMU) is a process which aims to harmonise the economic and monetary policies of the European Union (EU) Member States. This process comprises three phases:
- Phase No 1 (from 1 July 1990 to 31 December 1993): the free movement of capital between Member States;
- Phase No 2 (from 1 January 1994 to 31 December 1998): coordinating Member States’ monetary policies and strengthening cooperation between the Member States’ national central banks;
- Phase No 3 (from 1 January 1999): the gradual introduction of the euro and implementation of a single monetary policy under the responsibility of the European Central Bank (ECB).
The first two stages of EMU have been completed. The third and final stage is currently underway. It specifically concerns the introduction of the euro in the Member States. At present, 17 Member States have adopted the euro as a single currency. These States form the “euro area”.
Transition to the euro
Before being able to join the third phase of EMU, a Member State must first meet a number of economic and legal requirements.
The economic requirements are called the convergence criteria. The objective is to ensure that the Member State has a stable economy and financial situation in order to preserve the stability of the euro area.
According to the legal requirements, the national law must be compatible with the Treaty, particularly on the points relating to the national central bank and the currency.
When a Member State meets all the requirements, it is authorised to participate in the third phase of EMU and to adopt the euro as a single currency. The euro then replaces the former national currency and becomes the official currency of the Member State.
European Central Bank
The European Central Bank (ECB) has an essential role in EMU. It is the ECB that draws up the monetary policy of the Member States in the euro area. It also has the sole power to authorise the issue of euro banknotes. Furthermore, Member States may issue coins but the ECB must first authorise the annual amount to be issued.
The first Member States in the euro area
3 May 1998 is an historic date with regard to the launch of the 3rd phase of Economic and Monetary Union. On this date, the Council adopted a Decision acknowledging that 11 Member States had fulfilled the necessary conditions to adopt the single currency on 1 January 1999 (Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland).
The euro was then introduced in two stages:
- 1 January 1999: the euro was introduced as scriptural money and the conversion rates with the former national currencies were fixed. The former national currencies thus became non-decimal sub-divided units of the euro;
- 1 January 2002: euro coins and banknotes were introduced in the Member States. European citizens and businesses could then make their fiduciary payments in euros.
Greece, which did not fulfil the convergence criteria in 1998, requested a re-evaluation of its situation in 2000. The Commission then delivered a favourable opinion and Greece officially entered the 3rd phase of EMU on 1 January 2001.
Enlargements of the euro area
In principle, all EU Member States are supposed to join the 3rd phase of EMU and hence adopt the euro (Article 119 of the Treaty on the Functioning of the EU). However, certain Member States have not yet fulfilled the necessary economic and financial conditions. These Member States receive provisional derogations until they are able to join the euro area. Furthermore, Denmark and the United Kingdom have an exemption from participating in the euro (see below).
At least every two years, the Commission and the ECB assess the progress made by those Member States with derogations from the convergence and legal requirements. If they deliver a favourable opinion on the Member State’s ability to join the 3rd phase of EMU, the Council then adopts a decision on the Member State’s membership of the euro.
On the basis of this procedure, the euro area has been enlarged by several Member States:
- Slovenia, on 1 January 2007;
- Cyprus and Malta, on 1 January 2008;
- Slovakia, on 1 January 2009;
- Estonia, on 1 January 2011.
Currently, 17 of the 27 Member States have the euro as a single currency.
The United Kingdom and Denmark notified their intention not to join the 3rd phase of EMU and hence not to adopt the euro. These two States therefore have an exemption from participating in EMU. The exemption arrangements are detailed in the Protocols concerning these two countries which are annexed to the EU’s founding Treaties. Furthermore, the United Kingdom and Denmark reserve the option to end their exemption arrangements and to apply to join the 3rd phase of EMU.