Economic and Monetary Union in European Integration

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Page count 10
Word count 3057
Read time 11 min
Subject Economics
Type Essay
Language 🇺🇸 US

European integration

Economic and monetary union is important for the future unity of European integration (LavraÄŤ& Grauwe 1999). Monetary union is central in coordinating financial aid to Eastern European countries as well as the rest of the world through structured funds. Economies of countries that are less wealthy such as Ireland, Spain, Greece, and Portugal are slowly catching up with the other developed states. This has ensured significant progress as far as the unity of the European Union is concerned. Real benefits of the union are realized through the harmonization of costs related to businesses and labor across member countries. The geographical distribution of economies of scale within the community is also dependent on monetary integration.

According to the principles of international trade, monetary union and the community shall result in the balance of prices of products as well as factors of production (Patomäki& Minkkinen 1997). As such, the differences that could exist arise from the variation in industries between member nations shall remain united. The systems of production shall continue to diverge between the different states in the community as their degrees of consumption converge towards mutual prosperity of the European Union. Eventually, a cohesive union with diversity in the economic and monetary status of member countries shall establish the necessary platform for a political union.

On the other hand, countries with less prosperity in Europe are bound to suffer from the challenges in the specialization of labor and structures of production due to the resultant probability for rampant emigration of persons from these states to more developed countries (Verdun 2002). Consequently, peripheral countries shall deteriorate economically as a result of decreased consumption and investment which would reduce their chances of catching up economically with their developed counterparts. These negative aspects of the integration should be ameliorated through a monetary system that encourages the transfer of funds and capital from developed states to peripheral regions to discourage emigration.

The heterogeneous structure of the community especially with the accession of Portugal, Spain, and Greece has prompted the restructuring of funds with the goal of doubling provisions towards the realization of a common market (Matthiesen 2007). The challenges posed by the inclusion of peripheral status in the community and its diversity are economically related as far as the cost and benefits of the monetary union are involved. It is therefore optimistic to note that European economic integration shall result in greater comparative advantage and distribution of economies of scale. Economic integration provided a better environment for the cohesion of the community as compared to the monetary union of member states in the European Union.

A study of the divergent national markets reveals hierarchies with a multiplier effect with more credit restrictions in the developed regions as compared to the solvency of companies in the periphery regions resulting in bottlenecks in the distribution of investment funds (Oudenaren 2005). The original motive for European integration was informed by the immediate challenges of the Second World War. It was therefore founded as a means to eliminate problems and risks that accompany wars and other political conflicts in Europe.

The foundation for the establishment was done in 1952, through the formation of the European Coal and Steel Community by six countries namely: Belgium, France, Germany, Luxembourg, and the Netherlands. It was later followed by the adoption of the Treaty of Rome in 1957 which basically laid the foundation for the European Economic Community (Wiener& Neunreither 2000). The Werner report of 1970 presented the initial proposal for the establishment of a Monetary Union later in the 1980s if all went as planned. The proposals of this report were however overshadowed by world events characterized by the break-up of the Bretton Woods structure as well as the economic shock of the first oil crisis in 1973. As a result of these developments, most of the European economies suffered from high inflation and rampant unemployment. Most economies in Europe at that time were regulated by protectionist laws with poorly developed markets. These conditions were not favorable for the establishment of a monetary union then but the idea was eventually brought forward in 1988.

A single market program for the free movement of products, services, capital, and labor had been launched in 1985. This single market provided a viable opportunity for the monetary union since it provided a forum for the integration of European economies. A detailed proposal in the Delors Report for the formation of a monetary union was supported by its thorough description of a set up of institutions that could develop policies for a stable economy (Buller 2000). The final outcome would be manifested through the adoption of a single currency. The euro was eventually adopted as the single currency for the monetary union on first January 1999 after ten years of thorough research and technical preparations towards effective implementation of the Delors Report.

Development of the euro’s currency into coins and banknotes was actually completed in 2002. The stability of the currency is dependent on price stability, a task assigned to the eleven central banks of the member states. The credibility of the euro is also dependent on the nature and political independence of monetary policy decisions. The European Central bank is also protected by the Maastricht Treaty which equally cushions the other central banks from member states from unnecessary political pressures (Baun 1996). It is also important that financial strategy for the realization of the primary objective is harmonized by the central bank’s policies. The monetary policies of the European Central Bank can be further improved through the transparent approach which ensures stable prices with the lowest possible interest rates.

There exists a definition for price stability as designed by the Governing Council of the European Central Bank within the scope of the monetary policy and the primary objective of the European Community. The Euro system’s monetary policy is periodically explained through detailed press statements and bulletins after every meeting of the Governing Council and the European Parliament (Horváth 2006). The system has an established economic framework that guides member states on the applications of European economic integration. The public is properly informed about the progress of the system and the policy to establish transparency and credibility of the monetary system. The underlying principle of the system is based on the decentralization of the financial system among participating countries with the aim of taking advantage of the national central banks for mutual benefit.

The operations of the monetary policy are implemented by these national central banks while the decision-making process is conducted by the various arms of the European Central Bank. The single currency of the monetary union further improves macroeconomic stability and credibility of the underlying policies towards the economic benefit of the participating countries especially from the peripheral regions (KĂĽhnhardt 2008). Other benefits accruing from the single currency include microeconomic privileges such as decreased transaction costs, expanded financial markets, stability of prices as well as a healthy competition among member states. The monetary union provides a better financial framework for member countries to synchronize their credibility. Countries from peripheral regions can therefore be better placed to seek credibility assistance from their prosperous counterparts. This serves to stabilize the monetary policy in the long term for the mutual prosperity of the community.

The stability and the credible conditions provided by the Monetary Union insulate the financial markets from the speculative attack that could belonged by large corporations against the wishes of poor states. The credibility of the Monetary Union also ensures prices and interest rates are balanced thereby creating a proper investment environment for companies to prosper (Eliassen 1998). Microeconomic stability guarantees lower transaction costs as well as increased price transparency among member states. The introduction of the euro, therefore, provided a credible financial instrument for trading across borders in the euro area with reduced risks and increased competition. The result is a relatively high trading volume with decreased transaction costs. The euro has also provided for greater harmonization of market structures. Forex trading among member states as well as their stock markets has been extensively integrated thereby providing more opportunities for private investors and companies to engage in stable transactions.

As such, the Monetary Union has provided for stability of the exchange rates resulting incredible and reliable markets for exporters, importers, and investors with the Common Market (McGowan& Cini 1998). This is an advantage to the developing economies through the active utilization of the exchange rate as a financial tool of monetary policy instead of the conservative independent currencies. Traditionally, smaller economies experience harmful effects of interest rates due to higher costs of goods and services. It is therefore apparent that a global market environment presents challenges to an autonomous monetary policy that could be substantially managed through economic integration and the monetary union. The creation of the euro area provides for an assortment of benefits arising from the Common Market and the harmonized monetary policy of the European central bank as well as the national banks of the participating states. European nations that remain outside the European Community and the Monetary Union risk being on the receiving end of the global market.

British entry into the EC

The European Community proved to be a viable project in Europe and the rest of the world three years after its existence. Britain filed its initial application to join the community despite its failure to sign the Treaty of Rome that established it (Borrás, 2003). This development was inspired by Britain’s economic motive and political challenges. Britain has been experiencing economic problems that could have necessitated its submission to the union taking into account its economic benefits in view of the structured funds. Britain’s entry into the European Community was therefore a strategic move mean to position it well as far as the European Free Trade Area treaty signed in Stockholm is concerned. Britain being a principle partner in the deal provided a proper economic cooperation that designed a framework to reduce tariffs between European member states.

However, the trade treaty signed back in 1959 had been overshadowed by the emerging European community. The EFTA deal did not provide for an external tariff among its small member countries as compared to the European Community (Rees, 1998). The economic situation kept shifting with the reduction in internal tariffs by the European Union as well as its elaborate program for harmonizing external tariffs over an expanded market presented a lucrative economic environment. Britain had been a beneficiary of several trade agreements in the region such as the Overseas Sterling Area (OSA) that covered the entire British Empire and the Commonwealth. OSA was developed in order to shield member states from the breakdown of the international financial system in the period around 1931. This had resulted to the emergence of competing trading blocks accompanied by the Imperial Preference system.

OSA was typically a reserve of the gold assets and used the British sterling pound as its currency. This provided greater economic benefits to Britain in the whole deal at least financially. Consequently, Britain was better placed through its currency, to influence trade among participating countries. The arrangement was however beneficial to the rest of the member states but continued to favor Britain economically. Britain became the recipient of raw materials and cheap food supply with the rest of the Commonwealth Empire being beneficiaries of affordable industrial supplies (AlarcĂłn, 2004). On the other hand, external trade beside EFTA confinement proved expensive due to the need for changing currencies to foreign markets where EFTA states had little control.

The fastest growth of international trade in the late fifties remained in the domain of industrialized countries. Britain, on the other hand, had maintained trade between its Commonwealth partners. This presented the economic challenges that emerged in Britain since it extended commerce towards Europe which was already moving into an economic integration. European Community with a robust economic integration presented bottlenecks for countries outside the block from trading fruitfully. Denied access into markets shielded by the European Community statutes hindered economic growth in Britain. Britain was also being restricted by the OSA trade agreements making its application to enter the European community a deviation from the provisions of the treaty. This severely affected economic situation in Britain due to a decreasing GDP and a runaway inflation. It therefore demanded that greater technological cooperation and a larger market be included in Britain’s recovery program. Britain was politically inclined to the United States and economically to the EFTA alliance for a long time.

United States, however, shifted its support to the European Economic Community which therefore forced Britain to join the group in order to maintain its relationship with the USA (Lavrač& Grauwe, 1999). She therefore applied to join the group in order to spearhead its agenda both economically and politically. This could result in better bargaining power and a stronger relationship with the United States. On the other hand, the US believed that the entry of Britain into the community would strengthen it against the danger of communism and the imminent threat of German’s dominance. The Americans also believed that Britain would better placed to transform the community towards adoption of more liberal policies in trade which would in turn help to adjust US deficit due to balance of payments. Britain was therefore under pressure from its strongest ally, the US and the threat of being sidelined from the rest of Europe economically.

Commonwealth condition

Britain position in the Commonwealth continued to diminish as Third World countries began to gain independence after the Second World War. Even though most of these developing countries remained as member states to the Commonwealth, the anti-imperialist notion emerged among them. When Britain and France attacked Egyptian’s Suez Canal, its position as the leader of the Commonwealth movement became compromised severely. Britain was overpowered and defeated in the conflict by the United States that continue to assert its authority and power in the world. The Suez crisis therefore reduced the prestige and political influence that Britain enjoyed within the Commonwealth. There was also the tough debate on the expulsion of South Africa from the Commonwealth in the beginning of 1960’s. This divisive sentiment was further augmented by the declining state of political affairs in Britain. This was brought about by the vivid public apathy among the British population who developed the notion that Commonwealth was no longer the white man’s group after the inclusion of independent states from other races including blacks. It was therefore apparent that by the time Britain applied to join the European community, it was under immense pressure from both internal citizens and externally from its close associates.

Domestic politics

Britain’s application to become a member of the community appeared to be a move to escape from the domestic pressures from electorate to heal the perpetual deterioration of the economy (Verdun, 2002). The British government was therefore shifting political responsibility inherent in the demand for modernization and expansion of its economy to the European Community. The community was thus to act as a scapegoat due to the political relief it offered from the benefits of a Common Market membership which could spare the British government from the wrath of voters in the ensuing election. Most of the manufacturers and industrial companies approved Britain’s accession to the esteemed European Community as well as small and medium size enterprises due to the accompanying economic and monetary benefits that could arise from the deal.

An example was the support from the cotton textile industry which unanimously agreed to Britain entry into the community despite being a conservative industry. This is informed by the high tariffs that the community imposes on textile imports outside member states which could secure it from cheap textiles in the global market (Matthiesen, 2007). The British textile leaders re even quoted o have met their counterparts from the Common Market in order to seek their intervention meant to force their government to adhere to full protectionist tariffs as regards to the textile industry.

The final decision to join the European Community was therefore desperate move by the British government to secure its political influence in Europe as well as solve internal problems related to a dilapidating economy and the political stalemate. There was enough support from industrial, political and economic sector of the country towards the strategic Britain entry into the lucrative European community (Oudenaren, 2005). The decision is also understood to be a political move to sideline the Commonwealth block of countries whose dominance and subsequent opposition to Britain weakened British influence. Britain was much more interested in a sustainable relationship with the United States which had declared support for the community. British accession to the community provided an opportunity to create a perfect European Union which was also united in cause and purpose.


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EduRaven. (2021, December 30). Economic and Monetary Union in European Integration. Retrieved from


EduRaven. (2021, December 30). Economic and Monetary Union in European Integration.

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"Economic and Monetary Union in European Integration." EduRaven, 30 Dec. 2021,


EduRaven. (2021) 'Economic and Monetary Union in European Integration'. 30 December.


EduRaven. 2021. "Economic and Monetary Union in European Integration." December 30, 2021.

1. EduRaven. "Economic and Monetary Union in European Integration." December 30, 2021.


EduRaven. "Economic and Monetary Union in European Integration." December 30, 2021.


EduRaven. 2021. "Economic and Monetary Union in European Integration." December 30, 2021.

1. EduRaven. "Economic and Monetary Union in European Integration." December 30, 2021.


EduRaven. "Economic and Monetary Union in European Integration." December 30, 2021.