Analysis of the Economic and Monetary Union (EMU)

analysis of the scotch and monetary coalition ( emu)The Geography of atomic number 63an Integration Economy, high society and InstitutionsKourdoumpalou PanagiotaWhich of the following two sentences is more than likely to be correct in your opinion? Present at least two arguments to support your opinion.The asylum of a common financial union in the EU was a successful step towards deeper European desegregation.The idea of a common fiscal union in EU didnt take under friendship all the economic aspects resulting in its failure a few historic period later.Economic and Monetary married couple (EMU) represents a study step in the consolidation of EU economies. It involves the coordination of economic and fiscal policies, a common monetary policy, and a common currentness, the euro. The 28 EU Member States take fall in in the economic union, but some countries have taken integration further and adopted the euro.The decision to form an Economic and Monetary Union was taken by the European Council in Maastricht in December 1991, and was later enshrined in the Treaty on European Union. The Economic and Monetary Union helps the EU in its process of economic integration. Economic integration brings the benefits of great size, internal efficiency and robustness to the EU economy as a whole and to the economies of the individual Member States. This offers opportunities for economic stability, higher growth and more employment. On January, 1999, 11 of the 115 European Union (EU) countries formed the Economic and Monetary Union (EMU), adopting the euro as their common currency. Since then, in the Eurozone, the European primal Bank carries out a common monetary policy and, to a high horizontal surface, bond markets are enoughy integ come ind ( European Commission).The world of the Eurozone was preceded by a slack regulatory harmonization among European hackneyed markets and the ending of various restrictions on nonresidents, and also by an effort among EU countries to satisfy the Maastricht criteria for hook up withing the Eurozone. The effort to satisfy the Maastricht criteria also led to offendbalanced fiscal budgets, which may have led to a solid convergence of European economies, that is, an summationd synchronisation in line of products cycles crossways the European economies (Julian Alworth, Giampaolo Arachi, 2008).The introduction of the euro had many advantages. It improved transparency, it standardized the pricing in financial markets, and reduced investors transaction and information costs. Finally, the introduction of a whiz currency eliminated the currency happen within the EU and reduced the boilersuit exchange rate exposure of European stocks. This factor, together with the nominal and documentary convergence, should have led to more homogeneous valuations of equities in EMU countries (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, 2007). i way to evaluate if European stock markets beca me more unified during the mid-nineties is to examine the evolution of the relative influence of EU. When stock markets are partially integrated, both global and local risk factors are priced. There is a possibility of estimating a conditional asset pricing model with a timevarying grad of integration, which measures the importance of EU, wide market and currency risks which are relative to state of matterspecific risk (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, 2007).Each Eurozone country has its own timevarying degree of stock market integration. The degree of integration is bounded between zero and unity and conditioned on a broad set of monetary, currency, and business cycle variables. These variables estimate the gradual nominal and real convergence of the European economies during the premonetary union period. Among the include variables, the most prominent one is each countrys forward interest rate differential with Germany which was widely used by market analysts as an forefinger of the probability that an EU country would eventually manage to join the Eurozone. In the second half of the 1990s, the degree of integration gradually extendd to the shoot for where individual Eurozone country stock markets appear to be fully integrated into the EU market. There have been two main factors that driven the increase in the level of integration the evolution of the probability of joining the whizz currency and the evolution of lump differentials (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, 2007).Moreover, economic integration resulted in businesscycle convergence. Crosscountry return coefficient of correlations and business cycles are related. Monetary and fiscal policy coordination may have led to increased synchronization of business cycles among EMU member countries, which could have led to increased correlation of judge corporate earnings and more homogeneous estimates of European equities (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, 2007).In the 1990s there is a process of increased integration of European stock markets to the prospects of the formation of EMU and the adoption of the euro as the single currency. During the 1990s, the degree of integration of each countrys stock market with the EU market was negatively related to both its forward interest rate differential with Germany and its inflation differential with the best three performing countries. Also, the inflation differential was a major indicator of whether a country with a high inflation had the ability to achieve nominal convergence and satisfy a major criterion for admittance into the Eurozone. The process of integration was not easy, but in the second half of the 1990s, stock markets converged toward full integration. In other words, their expected returns became increasingly determined by EUwide market risk and less by local risk (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richa rd Priestleyd, 2007)Concluding, supporting evidence on the hypothesis that the prospect of EMU was the cause behind the point outd increase in stock market integration among Eurozone countries comes from two main sources. First, when we observe the experience in the United Kingdom, an EU country that chose not to join the Eurozone, is clearly different than the rest of the European stock markets. The UK market showed no signs of increased integration with the EU stock market. Second, the integration in Europe appears to be a Eurozonespecific phenomenon, which does not rely on contingent simultaneous worldmarket integration. So, now it can be verbalise that the establishment of a common monetary union in the EU was a successful step towards the European integration. It is obvious that the process of integration was not easy, but there was a convergence of the stock markets towards full integration. In other words, their expected returns became increasingly determined by EUwide mar ket risk and less by local risk.ReferencesEuropean Commission, Economic and Monetary Union. online Available at http//ec.europa.eu/economy_finance/euro/emu/index_en.htmGikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, (2007). The impact of EMU on the equity cost of capital. Journal of International Money and financeJulian Alworth, Giampaolo Arachi, (2008). Taxation policy in EMU, Economic Papers 3101