Unit IX – European Union and

Euro

Day and Date:

Unit Highlights

 Formation of European Union (EU)

 Introduction of Euro

 Concept of optimum currency areas

Text book reference chapters…

 International Economics by Dominick

Salvatore – Chapter 10

 International Economics by Francis

Cherunilam – Chapter 13
Let us recapitulate…
 European Union (EU), a Customs Union, was formed
in 1958

 A Customs Union removes all trade barriers among

member nations as well as adopts a common
commercial policy with the rest of the world.

 EU became European Common Market in 1993

European Union (EU)…
 The Customs Union, formed by Germany,
France, Italy, Belgium, the Netherlands, and
Luxembourg came into existence in July
1,1958, By the virtue of Treaty of Rome,
1957
 It expanded to 15 nations with the joining of
• UK, Denmark, and Ireland in 1973,
• Greece in 1981,
• Spain and Portugal in 1986, and
• Australia, Finland and Sweden in 1995.
EU…The basis of its formation
 Elimination of trade barriers
 Common tariff on imports from rest of the
world
 Free movement of resources
 Harmonizing fiscal, monetary, and social
security policies
 Adopt a common policy on agriculture,
transport, and competition in industry
EURO (€)

Common currency adopted at the beginning

of 1999 by 11 of the 15 member countries of
the EU.

 The 11 countries – Austria, Belgium, Germany, Finland, France,

Ireland, Italy, Luxembourg, Spain, Portugal, and Netherlands
 Greece was admitted on Jan.1, 2001
 Britain, Sweden and Denmark chose not to participate.
Creation of the Euro
 One of the most important events in
post-war monetary history.
 Introduced from January 1, 1999 as a
unit of account.
 Circulated as sole legal tender in the
participating nations by July1, 2002
Optimum currency area/bloc

A group of nations whose national currencies

are linked through permanently fixed
exchange rates.
Optimum currency area…
Advantages for member nations
 Eliminates uncertainties
 Greater price stability
 Saves the cost of official intervention in FX
market
 Saves cost of hedging
 Saves cost of exchanging FX/maintaining FX
reserves for payment of imports or enabling
foreign travel
Optimum currency area…
Disadvantage for member nations

 Independent stabilization and growth policies

cannot be pursued
Optimum currency area…
maximizing benefits

Benefits can be maximized and costs can be

minimized when there is,
 greater resource mobility
 greater structural similarities
 close coordination in fiscal, monetary, and
social policies
To conclude…

Economies have increasingly become more

interdependent. International policy
coordination is, hence, not only desirable but
essential.
You should now be able to…

 Trace the formation of European Union.

 Explain Euro.

 Elucidate on Optimum Currency Area, its

benefits, and costs to member nations.