European UnionThemanaged exchange rate system deals with trade rate between countries. Managedrates assume that one country sets the monetary policy, takes the exchange ratethat is given, and assumes the other country will go along with that rate. Theother country then tries to reduce inflation by setting their own exchange rate. The managed exchange rate system slows down exchange-rate movement through theforeign trade market intervention.
The whole purpose behind the European Unionis to maintain peace between the European counties, and to integrate them. Thefounding gentlemen of the EMS wanted to restore the integration of the EuropeanCommunities. In 1949, the Council of Europe was founder to promote political andsocial unity in Europe. Later in 1952, the European Coal and Steel Community wasstarted to “allay fears of a ?military-industrial complex’ fuellingrenascent German nationalism” (Artis & Lee 5).
Economic integration andunity was brought to a head in March of 1957 when the European EconomicCommunity and the European Atomic Energy Community were formed. These twotreaties were used to help stabilize and form the ECU. All three of theseorganizations/treaties were essential to forming what is today called theEuropean Union. The European Union/European Monetary System failed for threebasic reasons in the early 1990’s. First of all, it failed because it wasinefficient due to the low-inflation system and the recession in that timeperiod.
The recession elaborated on the conflicts between the member countriesof the European Union. Second, it is not sufficiently competitive at the currentrate of exchange. Third, the real interest rate of the world would need todecline drastically in order for the EU to work. Also in the early 1990’sthere were “smaller expectations of devaluations” (DeGrauwe 131). Thecurrent European Union has been a result of recent treaties.
The first treatythat was signed in February 1992 helped the unification of Europe be that muchcloser. It set the groundwork for one currency throughout Europe called theeuro. In order to update the current treaties the Amsterdam Treaty was signed asa result of the Intergovernmental Conference. This treaty resulted in a plan tolisten to the citizens, get closer to a more secure Europe, to make Europe morevocal throughout the world, and to make the European Union more efficient.
As ofJanuary of 1997 there were 15 countries belonging to the regional and economicEuropean 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 togrow and add more countries to this list. The banking system that the EuropeanUnion uses is a Central Banking System.
With the evolvement of the Euro theeconomics of Europe will be easier to maintain. As of January 1, 1999 thenational central banks and the European Central Bank were formed to helpinstitute the monetary policy using the euro. The macroeconomics theoryaccompanied with the use of economic analysis can illustrate the ideas behindthe EMS. The members of the EU have put a strong emphasis into the monetary andmacroeconomic policies. In order to “reduce inflation the tried to have morestable competitive conditions within in the EMS which resulted in strictexchange rates” (Levich & Sommariva 5).
The European Union has a long wayto go before it achieves 100% success. It is updated basically on a year-to-yearbasis. In order to continue to improve the Union they have established an Agenda2000. This agenda presents the major problems that they will encounter as theyear 2000 is approached.
First, they want to strengthen and reform the Communitypolicies to deal with a growing European Union. Second, they need to look at theother countries that have applied to be a part of the Union. Last, a budgetneeds to be established that includes all of their future plans. There are manyadvantages to having a united Europe to the people of Europe. One benefit istrade.
There is now a free movement of goods, services, people and, money withinthe countries belonging to the European Union. Having a united Europe, whichwill result in the euro, will benefit information technology, administrativechanges, and the information and training of employees. The benefits of the EUon citizens, businesses, and tourists will be determined by how much attentionis paid by each particular country to maintaining and promoting good relationswith one another. (Sumner & Zis 249) American businesses are affect by theunited Europe.
For example, in 1980-85 there was an unpredicted increase in thevalue of the dollar. As a result of the dollar appreciation many Americanindustrial firms that competed in the international market were more profitablethan in the past. The European Union also affects the business in the UnitedStates because the “cash forward market liquidity tends to ?dry up'” inthe middle of the afternoon because that is when the European currency tradersare going home for the day (Levich &Sommariva 95). Investors in the ECU aregrowing on a daily basis. Investors tend look at the Union as a risk-returninginvestment according to dollar assets and the foreign alternatives that areavailable. BibliographyDeGrauwe, Paul.
The Economics of Monetary Integration. Oxford: OxfordUniversity 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 Developmentsand 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.