European economic and monetary union: problems, prospects and global financial implications

The process of economic integration has made considerable progress during the 1990s. in the European Union (EU). Firstly, with the establishment of a single market in 1993 and now, within a relatively short period of time, the most significant yet, the movement towards a single currency for participating Economic and Monetary Union (EMU) members on 1 January 1999. This will have a major impact not only upon participating, and indeed non participating EU members, but also global financial markets in general with the establishment of a single currency (the euro) which has the potential to rival the US dollar as a major international reserve currency. The paper focuses upon the progress and potential problems arising from the establishment of EMU in the EU, and in doing so proceeds as follows. Firstly a brief review of recent developments in the EU is conducted focusing upon the framework for establishing EMU, the Maastricht Treaty. Secondly, economic theory and empirical evidence is analysed to establish whether the EU satisfies the necessary conditions for an optimum currency area. Thirdly, the prospects for the establishment of EMU on 1 January 1999 as well as its prospective members is identified. Finally, and importantly, the prospective global economic and financial implications arising from the establishment of a single currency for the EMU area is considered.