European Monetary Integration

European Monetary Integration

Past, Present and Future

Edited by Eric J. Pentecost and André Van Poeck

This highly topical book examines the development and future prospects for economic and monetary union in Europe. European Monetary Integration examines the background to economic and monetary union from a historical perspective that distinguishes between national and supranational currency areas, and an optimal currency area theory. The gradualist transition process is also considered.

Chapter 5: Monetary policy in EMU

Hubert Kempf

Subjects: economics and finance, financial economics and regulation, money and banking


Hubert Kempf 1 INTRODUCTION European Monetary Union (EMU) was officially introduced on 1 January 1999. After more than a decade of discussions, controversies, doubts and delays, a single currency officially and ‘irreversibly’ replaced the various currencies used in 12 countries of the European Union (EU). Only 3 countries either refused to or could not join EMU1. It is difficult to underestimate EMU’s originality: it is the first currency area linking advanced economies to have been set up at the same time as ‘dematerialized’ money, and which is to be regulated by modern banking techniques.2 That is, the new currency, the euro, is a fiat money, whose issuance is controlled solely by central banks. The architects and the authorities of EMU and the EU had to anticipate the challenge of any modern central banker: they had to face the difficulty of setting rules so that the money supply is set in accordance with the needs of non-financial agents throughout the economic area covered by the eurozone, and to establish a flexible yet safe and reliable system of means of payment. This is a daunting task within national barriers as our understanding of the workings of monetary policy is shallow at best.3 Within a multicountry monetary union, this is aggravated by two factors: G G The extent, diversity and complexity of EMU: this union is formed by 12 countries, populated by some 300 million inhabitants, differing in wealth, customs, and economic specialization, hence with different needs, accustomed...

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