European Union
The 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
available.
Bibliography
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.