Past, Present and Future
Edited by Eric J. Pentecost and André Van Poeck
Chapter 5: Monetary policy in EMU
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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