EMU, Financial Markets and the World Economy

Abstract

On January 1, 1999, 11 of the 15 member countries of the European Union (EU) entered the third and final stage of European Economic and Monetary Union (EMU). As of this date Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain adopted the euro as their common currency and shifted monetary policy decisions to the newly formed European Central Bank (ECB). Notwithstanding some minor and quickly resolved problems in the TARGET payments system and some volatility in overnight interest rates, the introduction of the euro was smoother than many observers had previously expected. The introduction of the single currency is not yet complete, however, as national currencies will continue to circulate and remain sole legal tender until 2002. Moreover, the time span since the euro’s promising start is still far too short in order to draw conclusions on the performance and effects of the single currency. Without doubt, however, EMU is an event of historic proportions with far-reaching implications in the years to come. For the EU, the adoption of a single currency constitutes a milestone in its post-World War II quest to strengthen economic and political ties within Europe. For the world economy, the euro’s launch is the largest change to the international monetary system since the breakdown of the Bretton Woods system in the early 1970s. Since its launch, the euro is one of the world’s leading currencies for investment and trade and an anchor for monetary policy for several countries in Eastern Europe and Africa. With the euro area having the second highest share of world GDP and the highest share of world trade, there is hardly a country or region that will not be affected by EMU.