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Chapter 20 Optimum Currency Areasand the European Experience Preview The European Union The European Monetary System Policies of the EU and the EMS Theory of optimal currency areas Is the EU an optimal currency area? Other considerations of a economic and monetary union What Is the EU? The European Union is a system of international institutions, the first of which originated in 1957, which now represents 25 European countries through the: European Parliament: elected by citizens of member countries Council of the European Union: appointed by governments of the member countries European Commission: executive body Court of Justice: interprets EU law European Central Bank, which conducts monetary policy, through a system of member country banks called the European System of Central Banks What Is the EMS? The European Monetary System was originally a system of fixed exchange rates implemented in 1979 through an exchange rate mechanism (ERM). The EMS has since developed into an economic and monetary union (EMU), a more extensive system of coordinated economic and monetary policies. The EMS has replaced the exchange rate mechanism for most members with a common currency under the economic and monetary union. Membership of the Economic and Monetary Union To be part of the economic and monetary union, EMS members must first adhere to the ERM: exchange rates were fixed in specified bands around a target exchange rate, next follow restrained fiscal and monetary policies as determined by Council of the European Union and the European Central Bank, finally replace the national currency with the euro, whose circulation is determined by the European System of Central Banks. Membership of the EU To be a member of the EU, a country must, among other things, have low barriers that limit trade and flows of financial capital adopt common rules for emigration and immigration to ease the movement of people. establish common workplace safety and consumer protection rules establis