European Union Essay Research Paper Themanaged exchange

European Union Essay, Research Paper


managed exchange rate system deals with trade rate between countries. Managed

rates assume that one country sets the monetary policy, takes the exchange rate

that is given, and assumes the other country will go along with that rate. The

other country then tries to reduce inflation by setting their own exchange rate.

The managed exchange rate system slows down exchange-rate movement through the

foreign trade market intervention. The whole purpose behind the European Union

is to maintain peace between the European counties, and to integrate them. The

founding gentlemen of the EMS wanted to restore the integration of the European

Communities. In 1949, the Council of Europe was founder to promote political and

social unity in Europe. Later in 1952, the European Coal and Steel Community was

started to ?allay fears of a ?military-industrial complex? fuelling

renascent German nationalism? (Artis & Lee 5). Economic integration and

unity was brought to a head in March of 1957 when the European Economic

Community and the European Atomic Energy Community were formed. These two

treaties were used to help stabilize and form the ECU. All three of these

organizations/treaties were essential to forming what is today called the

European Union. The European Union/European Monetary System failed for three

basic reasons in the early 1990?s. First of all, it failed because it was

inefficient due to the low-inflation system and the recession in that time

period. The recession elaborated on the conflicts between the member countries

of the European Union. Second, it is not sufficiently competitive at the current

rate of exchange. Third, the real interest rate of the world would need to

decline drastically in order for the EU to work. Also in the early 1990?s

there were ?smaller expectations of devaluations? (DeGrauwe 131). The

current European Union has been a result of recent treaties. The first treaty

that was signed in February 1992 helped the unification of Europe be that much

closer. It set the groundwork for one currency throughout Europe called the

euro. In order to update the current treaties the Amsterdam Treaty was signed as

a result of the Intergovernmental Conference. This treaty resulted in a plan to

listen to the citizens, get closer to a more secure Europe, to make Europe more

vocal throughout the world, and to make the European Union more efficient. As of

January of 1997 there were 15 countries belonging to the regional and economic

European Union. The countries currently involved are Austria, Belgium, Denmark,

Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal,

Spain, Sweden, and the United Kingdom. In the future the European Union hopes to

grow and add more countries to this list. The banking system that the European

Union uses is a Central Banking System. With the evolvement of the Euro the

economics of Europe will be easier to maintain. As of January 1, 1999 the

national central banks and the European Central Bank were formed to help

institute the monetary policy using the euro. The macroeconomics theory

accompanied with the use of economic analysis can illustrate the ideas behind

the EMS. The members of the EU have put a strong emphasis into the monetary and

macroeconomic policies. In order to ?reduce inflation the tried to have more

stable competitive conditions within in the EMS which resulted in strict

exchange rates? (Levich & Sommariva 5). The European Union has a long way

to go before it achieves 100% success. It is updated basically on a year-to-year

basis. In order to continue to improve the Union they have established an Agenda

2000. This agenda presents the major problems that they will encounter as the

year 2000 is approached. First, they want to strengthen and reform the Community

policies to deal with a growing European Union. Second, they need to look at the

other countries that have applied to be a part of the Union. Last, a budget

needs to be established that includes all of their future plans. There are many

advantages to having a united Europe to the people of Europe. One benefit is

trade. There is now a free movement of goods, services, people and, money within

the countries belonging to the European Union. Having a united Europe, which

will result in the euro, will benefit information technology, administrative

changes, and the information and training of employees. The benefits of the EU

on citizens, businesses, and tourists will be determined by how much attention

is paid by each particular country to maintaining and promoting good relations

with one another. (Sumner & Zis 249) American businesses are affect by the

united Europe. For example, in 1980-85 there was an unpredicted increase in the

value of the dollar. As a result of the dollar appreciation many American

industrial firms that competed in the international market were more profitable

than in the past. The European Union also affects the business in the United

States because the ?cash forward market liquidity tends to ?dry up?? in

the middle of the afternoon because that is when the European currency traders

are going home for the day (Levich &Sommariva 95). Investors in the ECU are

growing on a daily basis. Investors tend look at the Union as a risk-returning

investment according to dollar assets and the foreign alternatives that are


DeGrauwe, Paul. The Economics of Monetary Integration. Oxford: Oxford

University Press, 1994. Giavazzi, Francesco, Stefano Micossi, and Marcus Miller.

The European Monetary System. Cambridge: Cambridge University Press, 1988.

Levich, Richard M., and Andrea Sommariva. The ECU Market: Current Developments

and Future Prospects of the European Currency Unit. Lexington: Lexington Books,

1987. Sumner, M.T., and G. Zis. European Monetary Union: Progress and Prospects.

New York: St. Martin?s Press, 1982.


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