The Economic and Monetary Union: Institutions and Credibility

The Economic and Monetary Union (EMU) which has its legal basis in the Maastricht Treaty was established on January 1, 1999, the ultimate date of its intended enactment. At the core of this institution is the Monetary Union which meanwhile comprises twelve member states and forms a currency area of considerable size and, until now. remarkable stability. Still, however, discussion is going on whether it can survive as an institution providing the highest degree of monetary integration which is a single monetary policy for a group of member countries with divergent economic performance. It is also questioned whether it can withstand financial crises in international markets and contribute to the stability of the global financial system. In the next lectures, we address the first question. We describe the institutional set-up of the European monetary union and analyse how monetary policy works within this framework and how it is coordinated with other branches of macroeconomic policy, in particular fiscal policy. We shall see that the concept of credibility, which will be introduced in this lecture, is at the core of these issues. We turn to the international role of the Euro area in a later lecture.