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COST AND BENEFITS OF INTEGRATION IN THE

EUROPEAN UNION AND IN THE ECONOMIC
MONETARY UNION (EMU)

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 COST AND BENEFITS OF INTEGRATION IN THE
EUROPEAN UNION AND IN
THE ECONOMIC MONETARY UNION (EMU)

ARISTIDIS BITZENIS ● ANDREAS ANDRONIKIDIS

ABSTRACT. The paper discusses the advantages (associated benefits)

and disadvantages (potential and realized costs) of entering the EU
and the EMU for country members, accession and potential for
accession countries. The benefits from integration are multidimen-
sional: political, economical and cultural, while the EU entrance is
not considered to be without costs; for example, expenses related to
the adoption of all EU norms and standards by enterprises, thre-
atens to domestic producers’ market position, and reduced autonomy
in countries’ decision making process. The benefits for entering the
EMU are mainly connected with the five Maastricht criteria (low
interest rates, low inflation, stable monetary policy, stable exchange
rate policy when we utilize one common monetary policy and one
currency, strict budgetary policy – limited debt/GDP and deficit/
GDP ratios), while EMU participation is related with costs for
improvement of legislature, costs of compliance with European
principles, and costs for total modernization of the industrial poten-
tial. The authors come to the conclusion that realized and/or per-
ceived benefits from EMU and EU membership depend mainly on
special characteristics of each country member.

7
 1. INTRODUCTION

European Union serves for country-members as a me-

ans for coping with globalization challenges and achieving
greater prosperity and wealth (European Council, 2000). Dif-
ferent definitions of integration are found in relative literature.
They come to the conclusion that European integration is a
process, during which a single market is created by eliminating
all economic and non barriers, influencing political and eco-
nomical climate (Tsoukalis, 1997; Mussa 2000). The inte-
gration process is defined as the gradual elimination of eco-
nomic frontiers between independent states, resulting the eco-
nomies of these states to function as one entity (Molle, 1990).
We can distinguish six forms of economic integration.
Beginning with the Preferential Trading Area where a region
becomes a block trade of countries with lower taxes and tariffs,
secondly we have the free trade area, in which regional ini-
tiatives are the principal means for eliminating trade barriers
such as tariffs, quotas and others. The third form of economic
integration refers to customs unions, where countries adopt
common external trade policies towards non-members. Com-
mon market is the fourth step along the path of economic
integration, where barriers that inhibit the movement of
factors of production – labour, capital and technology – among
its members are eliminated. An example is the European Com-

8
munity (EC), which is informally known as the Common Mar-
ket. The fifth form refers to Economic and Monetary Union
where the major goal is the coordination of economic policies
among country-members. Actually at the end of 1992, we have
the establishment of the free single market when the Maas-
tricht treaty was signed by removing the physical (borders),
technical (standards) and fiscal (taxes) barriers among the
member states. These barriers obstruct the freedom of move-
ment of the four factors of production. Various researchers use
the alternative terms of single market such as internal market
or integrated market. Although these terms can be considered
as synonyms, we can argue that the Internal Market is not
completed yet. Indeed, creating a genuinely integrated market
is not a finite task but rather an ongoing process requiring
constant effort, vigilance and up-dating. Finally, the highest
(sixth) level of economic integration refers to political and
economic union such as the United States of America, or the
United Kingdom.
In the next sections, the following format was adopted.
First, we present the historical aspects of integration in the
European Union (Section 2), and then we discuss costs and
benefits of entering EU (Section 3). Section 4 provides the
historical background for the establishment of the EMU, while
Section 5 discusses the costs and benefits of EMU for com-
panies, people, and the economy of the member countries.

9
 2. BACKGROUND – INTEGRATION IN
THE EUROPEAN UNION

The integration process of Europe began in 1950 with

the Treaty of Paris when a European community of coal and
steel was created. Another effort, without success, took place in
1954 aiming at the creation of a European defensive com-
munity. The Treaty of Rome (1958) was the beginning of the
European Economic Community and the European Atomic
Energy Community “EURATOM”. During this period of time,
there were no specific criteria for admission to the European
Economic Community (EEC) apart from the fact that the ap-
plicant country should be from Europe, a democracy and its
economy should be developed enough to enable it to meet the
obligations of membership and to be able to compete ef-
fectively within a free market.
Since 1958, EU enlargement was the major goal of the
European Economic Community (EEC). Enlargement mainly
refers to the removal of obstacles relevant to free movement of
goods, services, capital and human capital from one country-
member to another (Szabo, 2003). Schimmellfeninning and
Sedelmeier (2002) provide another definition of enlargement,
describing it “as a process of gradual and formal horizontal
institutionalization of organizational rules and norms” (p. 3).
The six founder nations, Italy, West Germany, France,
the Netherlands, Belgium and Luxembourg intended to a-

10
chieve a gradual integration of the economic policies of each
single country. In this way, different goals were set. Some of
them were: the development of economic activity throughout
the Community, the achievement of political stability, the im-
provement in the standard of living, the development of close
relationships among countries-members, and finally, gradual
expansion.
On this basis, the enlargement of the Community was
accomplished in four stages: the UK, Denmark and Ireland
joined in 1973 (1st EU enlargement), Greece in 1981, Portugal
and Spain in 1986 (2nd EU enlargement), Austria, Finland and
Sweden in 1995 (3rd EU enlargement) and Hungary, Poland,
Slovakia, Latvia, Estonia, Lithuania, the Czech Republic, Slo-
venia, Malta and Cyprus entered in May 2004 (4th EU en-
largement).
The process of integration proceeded relatively slow
during the 70's, unlike the previous decade when giant steps
were taken. Moreover, progress was difficult as a result of the
economic tension brought about by the so-called "oil shock"
(1973). The establishment of the European Monetary System
(EMS), the launch of new industrial and regional policies, pro-
longed talks for a community budget and the contribution to
be paid by each member country, were all attempts to con-
solidate, a protection of the "old" and acquired, and a new

11
driving force towards European integration through research
into the "new".
The European Plan gained new impetus in the 80's with
the Single European Act (1986). This was the first revision of
the Treaty of Rome and ratified the undertaking to complete
the internal market with the free circulation of people, goods,
services and capital by 1992. It was an important step forward
towards economical integration. The political agreement on
the programme to complete the internal market also led the
way to institutional reforms.
Besides re-launching community policies for social and
economic cohesion, for research and technological develop-
ment and for the environment and health, the Single European
Act had an innovating effect on international balance. The
main interventions, although limited, were the extension of
qualified majority voting in decision-making processes, and
the mutual recognition of national rules and regulations, which
member states agreed to accept as equivalent to their own.
At the time the Maastricht Treaty was being negotiated
in 1990-1991, both economists and politicians alike exten-
sively judged the European Monetary System (EMS) as a suc-
cess. The precariousness of the exchange rate between the
European currencies was significantly reduced: between 1979
and 1985, it was half what it had been in 1975-1979, and it
was halved again between 1986 and 1989. The drop in and the

12
junction of both inflation rates and long-term interest rates
further contributed to the success of the EMS.
The Maastricht Treaty marks a new phase in the foun-
dation of the union and it could be considered as a response to
challenges from the external environment. One of the major
achievements of this specific treaty was the settlement of the
objectives of the Economic and Monetary Union (EMU) which
were described as the continuous economic development, with
low inflation, low unemployment and social protection. More
specifically, the committee proposed certain criteria and con-
ditions for the integration of state-members in the European
union: (1) European territory: The commission judged that the
report in European state, eligible firstly for integration, should
not be also determined; consequently the issue of limits of
Europe must remain open. (2) Political conditions: The com-
mission propounds that with the treaty of the European Union,
a country that wishes to enter the union should fill three basic
conditions: a) European identity b) a democratic rule of go-
vernment and c) respect for human rights. (3) Acquis com-
munautaire: The candidate country should accept and be in
position to apply the Aquis communautaire. In the opinion of
the committee, this criterion presupposes, the existence of
economy of market that functions and is competitive, as well
as suitable a legal and administrative frame in the public and
private area. (4) As Pryce (1994) noted, the candidate country

13
must be willing to accept a common foreign policy and a com-
mon policy of safety - the policy in the Treaty of Maastricht.
The Amsterdam Treaty was agreed upon by the po-
litical leaders of the EU on 17 June 1997 and signed on 2 Oc-
tober 1997. It is the first of the fundamental Community
Treaties to be programmed (but also that – as we reported al-
ready – it programmed its revision). The main achievements of
this treaty were: (1) It established a new chapter with regard to
employment and focused on the co-ordination and the en-
couragement of national policies in this sector. The fighting off
of unemployment was placed henceforth as constitutional
objective of the Union that commits so much itself, and its
members. (2) Aid of rights of citizens that was placed in the
epicentre of Treaty: fundamental rights of European citizen
they are guaranteed henceforth constitutionally. For states
members that offend systematically this rights are forecasted
sanctions by the Union. (3) It creates a "space of freedom,
safety and justice" in the interior of the Union, facilitating the
free circulation and strengthening the juridicial and police
collaboration. The Convention of Schengen is incorporated in
the new Treaty and its application beings in the Community
processes and controls.
The Treaty of Nice was signed on 26 February 2001
and came into force in 2002. Although, Austria, France, Fin-
land, Germany, the Netherlands, Portugal, Spain, Sweden, the

14
UK and Luxembourg ratified the treaty in 2001 while the other
members followed in 2002, the ratification process was pla-
gued by difficulties after a referendum in Ireland on 7 June
2001 that rejected the treaty (more than 50% of the votes were
negative). However, about a year and a half later Ireland
approved the treaty (http://www.unizar.es/euroconstitucion/
Treaties/Treaty_Nice_Rat.htm).
It has been suggested that the Treaty of Amsterdam
was unable to resolve three crucial questions: the composition
of the institutions (especially the size of the Commission), the
credibility of the votes in the Council, and the extension of
qualified majority voting related to the co-decision procedure
under the fifth enlargement -since the members will increase
and a major need for an institutional reform will be necessary
(Tsebelis and Yataganas, 2002; Yataganas, 2002). Hence, the
aim of the Treaty of Nice as Molle (2001) stated, was to set out
to amend the EC Treaties in two main ways: firstly, to fulfill
the requirements of the Treaty of Amsterdam by introducing
new institutional and decision-making arrangements to pre-
pare the EU for enlargement of up to 27 members and se-
condly to amend existing institutional arrangements where
weaknesses have been perceived. However, the Treaty of Nice
failed to produce these reforms. The institutions and decision
mechanisms of the European Union had to be adjusted in or-
der to safeguard their function in an enlarged Union. In the

15
light of this objective, the results of the Nice European Council
of December 2000 were far from satisfying. Many reform ele-
ments could not be realized that had been identified as es-
sential to the 27 countries comprising the EU. Examples in-
volve the failure to extend qualified majority voting to policy
fields of political substance and the failure to augment the
number of Parliament seats above the 700 ceiling set in Am-
sterdam (Heinemann, 2003).
Finally, the Constitution for Europe was approved at
the European Council in Brussels on 18th June 2004 and si-
gned in Rome on 29th October 2004 by the 25 Member States
of the European Union. The candidate countries, Turkey, Bul-
garia and Romania signed only the Final Act. Croatia parti-
cipated as an observer nation. Member States will now have to
ratify the Constitution in accordance with the modalities of
their national legislations. In the ratification of the European
Constitution by open referenda, citizens’ opinion will have a
greater importance than ever before. The constitutional treaty
opened a period of ratification to be finished by October 2006.
To date, 13 member states have already ratified the treaty
(Austria, Belgium, Cyprus, Greece, Germany, Hungary, Italy,
Latvia, Lithuania, Malta, Slovakia, Spain, and Slovenia), either
by parliamentary procedures or by referendum. Two countries
have expressed their rejection (France, the Netherlands) and
the remaining member states either have the ratification pro-

16
cess on hold or have still not decided on the ratification pro-
cedure. After the rejection of the text by French and Dutch
citizens, member states agreed to convoke a Reflection Period
(http://news.bbc.co.uk/1/hi/world/europe/3954327.stm).

3. COST AND BENEFITS OF INTEGRATION IN

THE EUROPEAN UNION

The acquis communautaire is the basic literature to

start research into the cost and benefits of enlargement. It
consists of an entire framework of European Community le-
gislation accumulated and systematically amended over the
last 45 years where adoption is the basic criteria for accessing
EU. The chapters of acquis were 31 for 10 countries that en-
tered in May 2004 as well as for Bulgaria, Romania, but they
will become 35 for the future applicants such as Croatia,
FYROM, etc. The 35 chapters of acquis such as the free
movement of people, goods, services, capital; Sectoral policies,
SME’s, Regional Policies, Single monetary Union, Justice and
Home affairs, to mention a few, entail the foundation for
negotiations between the EU and the candidate member states
(Table 1).

17
 Table 1: chapters of acquis correspondence

5th Enlargement 6th Enlargement

1. Free movement of goods

1. Free movement of goods
7. Intellectual property law

2. Freedom of movement for

2. Free movement of per- workers
sons

3. Right of establishment and

freedom to provide services

3. Right of establishment and

3. Freedom to provide ser-
freedom to provide services
vices
9. Financial services

4. Free movement of capital 4. Free movement of capital

5. Company law 6. Company law

8. Competition policy
6. Competition policy
5. Public procurement

11. Agriculture and rural de-

7. Agriculture
velopment

18
 12. Food safety, veterinary and
phytosanitary policy

8. Fisheries 13. Fisheries

14. Transport policy

9. Transport policy 21. Trans-European networks
(one half of it)

10. Taxation 16. Taxation

11. Economic and Mone- 17. Economic and monetary po-

tary Union licy

12. Statistics 18. Statistics

13. Social policy and em- 19. Social policy and employ-
ployment ment (including anti-discrimina-
tion and equal opportunities for
women and men)

15. Energy
14. Energy 21. Trans-European networks
(one half of it)

15. Industrial policy

20. Enterprise and industrial
16. Small and medium-sized policy
enterprises

19
17. Science and research 25. Science and research

18. Education and training

26. Education and culture
19. Telecommunication and
information technologies
10. Information society and me-
20. Culture and audio-vi- dia
sual policy

21. Regional policy and co- 22. Regional policy and coor-
ordination of structural in- dination of structural instru-
struments ments

22. Environment 27. Environment

23. Consumer and health 28. Consumer and health pro-

protection tection

23. Judiciary and fundamen- tal

24. Cooperation in the field rights
of Justice and Home Affairs 24. Justice, freedom and secu-

rity

25. Customs union 29. Customs union

26. External relations 30. External relations

27. Common Foreign and 31. Foreign, security and de-

Security Policy (CFSP) fence policy

20
28. Financial control 32. Financial control

29. Financial and budgetary 33. Financial and budgetary pro-

provisions visions

30. Institutions 34. Institutions

31. Other issues 35. Other issues

Source: Authors’ Research, www.wikipedia.com

For the negotiations with Croatia and Turkey, the ac-

quis was split up into 35 chapters with the purpose of better
balancing among the chapters: dividing the most difficult ones
into separate chapters for easier negotiation, uniting some
easier chapters, moving some policies between chapters, as
well as renaming a few of them in the process. The 6th Enlar-
gement Policy includes Turkey, Croatia and FYROM at the
moment and will include Serbia & Montenegro, Albania, and
Bosnia & Herzegovina in the near future. The previous table,
Table 1, also presents the correspondence among the 31
chapters of the 5th Enlargement and the 35 chapters of the 6th
Enlargement.
From the acquis, it is suggested that the benefits from
integration are multidimensional: political, economical and
cultural for the EU country members, the accession countries
and the ones potential for acceding. The EU integration is not

21
confined simply to economic benefits from the establishment
of a single market but it consists of the overall progress in both
legal, institutional and standards to increase the freedom and
scope of choice for consumers and producers as well as for
savers, enterprises and employees that is crucial for achieving
comparable living standards across countries. Realised be-
nefits of EU accession are closely related to benefits from the
adoption of acquis communautaire.
Table 2 summarizes the advantages and disadvantages
from becoming a member of the EU as discussed in the li-
terature (Nuti, 2002; Harrisson et al., 1996; Baldwin et al.,
1997; Messerlin, 2001).

Table 2: Advantages and Disadvantages from being an EU

Member
ADVANTAGES FROM COSTS FROM BEING AN EU
BEING AN EU MEMBER MEMBER
Enhancement of market The costs of adoption of all EU
opportunities (increased norms and standards by enter-
market) prises
Reduction of trade bar- Migration issues –
riers or even elimination Increased Criminality
of either tariff or non-ta-
riff barriers
Reduction of business Fear that the highly skilled would

22
cost emigrate from the accession co-
untries to the EU (15)
Reduction of costs of new Fear that the enlargement will
market entry encourage the relatively unskilled
to leave the accession countries
to take up employment in the EU
(15)
Free movement of em- Fear that the wages would be
ployers/employees across depressed in the EU(15)
borders to find and take
up employment
Streghthening of interna- Fear that the unemployment
tional accounting standards would rise in the EU(15)
Transparency in business For example, the Norway reluc-
operations and business tance towards membership is re-
performance lated to the perceived compro-
mise of Norwegian identity with
a constant struggle for political
independence, society and highly
subsidized welfare model and
broad and diverse EU com-
munity.
Facilitation of business o- Challenges for the poorest of the
perations by increasing EU member states such as
the intensity of compe- Greece, Spain, and Portugal due

23
tition.
High growth rates
Peace and stability
More FDI and trade flows Costs of compliance with Euro-
trough enlargement
Faster growth of consumer
incomes (due to GDP growth)
Stabilization and stren- Deteriorate security and EU re-
gthening of institutions
to Structural Funds adjustments
perspective
Enlargement negative impact on
Spain and other weak EU (15)
economies from trade, FDI, mi-
gration and Structural /cohesion
Funds adjustments perspective
Costs for improvement of le-
gislature
pean principles.
Costs for total modernisation of
the industrial potential.
sources (require vast resources
and coordination of policies,
needs establishment of bridge
gaps in economic development
while alleviating structural dis-
crepancies by subsidizing infra-
structure and agricultural reform
but “even with modifications to
the present European institu-
tions, a larger and more diverse
European Union is likely to be a
24
 weaker union).
Increased administration Fears for losing economic ad-
capabilities and respect vantages, and compromising cul-
for the rule of law ture standards, religion and
tradition.
Exploitation of the wage Threats to domestic producers’
cost advantages in central market position. Loss of market
and eastern European share for local companies and
countries (CEECs) especially for the SMEs due to
the increased competition, and
the participation of foreign
companies.

Greater international in- The transition costs can be very

tegration and policy coo- high for weak countries with bad
peration /weak economies and environ-
ments.
Improvement of invest- Greek and producers from other
ment climate and busi- weak economies will need to im-
ness environment port new equipment and techno-
logies from advanced countries
such as Germany and France.
This extra cost may lead to a
decrease of the producer surplus.

25
Better regulations to start Many of the EU businesses attach
up and more predictable higher risks to invest in the ac-
investment decisions and cession countries due to weak-
business operations, a- nesses in the business infra-
voidance of bureaucratic structure both the “hard” infra-
and selective behaviour of structure but, especially, the
administration in obtain- “soft” business environment.
ing licences
Easier Technology trans- For example, the French are a-
fer gainst compromising French in-
dependence and possible inte-
gration of countries that they are
not European in essence, such as
Turkey.
New markets will provide EU benefits are already achieved
new ideas for CEEC en- for the EU applicant countries
trepreneurs before their entrance.
Strengthen company ma- advanced countries may pay “the
nagement and capital fine tuning” of the weak coun-
markets tries for several years

Countries will not deal another kind of bureaucracy may

with different trade re- exist in the European union con-
gimes and custom re- text (a centralized system)
gulations

26
Challenges from Struc- There is no exit from the Eu-
tural and Fund eligibility ropean union
for the new EU members

Source: Authors’ Research

According to Viner (1950) and Meade (1955), the ma-

jor benefits from EU entrance are: (1) Increase of trade and
capital flows. (2) Improvements of hard and soft infrastructure
by the structural funds given to country-members. (3) De-
crease of the risk for business by fostering macroeconomic,
legal and political stability. (4) Improvement of the quality of
life and standards of living. (5) Use of efficient methods of
production, by the integration of new technologies, whose cost
is subsidized partially by the EU. (6) Reduction of prices of
goods, due to the existence of free market.
Brown et al. (1997) refer to welfare increase as an im-
portant benefit related to EU membership. In detail, a research
made in Eastern European countries by the use of the Mi-
chigan Model of World Production and Trade, has shown that
a welfare increase of 3.8 to 7.3 per cent is expected for
countries entering the EU. At the same time, Keuschnigg et al.
(2001) highlight the trade liberalization as a great benefit from
EU membership. Since cuts in trade and agricultural tariffs
occur due to European Agreements, real trade costs decrease
and country-members improve their trade equilibrium.

27
 At the macro-economic level, the enlargement is ex-
pected to have an impact on the growth rate of the EU GDP,
which is linked to the faster growth of consumer incomes,
purchasing power (due to changes in population structure and
preferences) and in turn, will enhance market opportunities.
The easier physical movement of goods across borders within
the EU countries will avoid delays to movement of shipments
of inputs or final products, while introduction of common
product standards will reduce the costs of new market entry
(Cecchini Report, 1998).
The prevention of counterfeiting, the adoption and
implementation of the company law, and the strengthening
international accounting standards will increase transparency
in business operations and business performance. At the same
time, the enhanced ability to move expatriate managers due to
free movement legislation will enable the EU to profit from the
creativity and enthusiasm of talented and skilled managers
from other countries members and enable inward investors to
develop their business and overcome shortages of skilled
managers (Nuti, 2002).
On the other hand, the EU entrance is not considered
to be without costs for country-members. Strapec at al. (1999)
mention the adoption of all EU norms and standards by
enterprises, and threats to domestic producers’ market po-
sition as the most serious costs for countries entering the EU.
Another cost refers to reduced autonomy in the decision ma-

28
king process, an important factor since countries have dif-
ferent backgrounds and needs.
The transition costs can be very high and costly for
countries with weak economies and environments. A study by
Matsaganis et al., 2003, suggested that the producer surplus of
Greece and Italy will decrease significantly due to low prices,
because a free market zone drives down prices on goods. In
addition, Greek and Italian producers will need to import new
equipment and technologies from Germany and France. This
extra cost may lead to a decrease in the producer surplus.
Richter (1998) considers that many of the European
members are not concerned with accession costs, since mem-
bership was mostly a political decision. In other words, co-
untries decided to join the EU taking into consideration mostly
the security benefits as their political situation was really
negative. In this way, costs did not truly matter.
To sum up, entrance to the EU, benefits country-
members in different ways. Trade liberalization, increase in
FDI, EU funds for improvements in infrastructure and im-
provements in financial indexes are some indicative benefits.
On the other hand, some of the more serious costs are related
to transactional costs, changes in financial and monetary
policies as well as big investments in technology and other
sectors.

29
 4. THE THREE STAGES PLAN FOR THE
ESTABLISHMENT OF THE EMU

In 1988, the European Council of Hanover established

the Delors Committee to recommend proposals to achieve Eu-
ropean monetary union but interestingly, enough, the com-
mittee was not asked to discuss whether the EMU was a good
idea. ERM was not the perfect instrument to deliver stability in
the money market. Accordingly, small, extremely integrated
European economies needed to evade large exchange rate fluc-
tuations and since ERM members had already relinquished
monetary sovereignty by letting Germany set the single in-
terest rate in the ERM, formal authorization of a monetary
union did not seem such a big step (Jabko, 1999).
Delors recommended a three-stage plan (Table 3),
which presented ways of achieving greater coordination of
economic and monetary policies, leading to the foundation of a
European currency and a European Central Bank. The Eu-
ropean Central Bank (ECB) sets monetary policy for all Eu-
ropean Union countries adopting the single currency. It is the
successor to the European Monetary Institute. The ECB works
with national central banks within the European System of
Central Banks (ESCB). Its key tasks are to: (1) Define and
implement monetary policy, such as setting interest rates (2)
Maintain price stability (3) Support economic policies of mem-
ber states as long as they do not affect price stability (4)

30
Conduct foreign exchange operations and look after the official
foreign reserves of the member states (5) Promote the smooth
operation of payment systems that link banks.

Table 3: Stages of the Maastricht Treaty

STAGE 1 STAGE 2 STAGE 3
(July 1990 - (from 1st (from 1st
December 1993) January 1994) January 1999)
• Free circulation • States adopt • Irrevocable
of capital economic and fixing of
among union monetary conversion
countries policies in rates.
• It is forbidden convergence. • Introduction
to grant public • Exchange level of the euro.
loans to firms at based on • Conduct of
favourable credibility of the single
conditions. economic monetary
• Independence policies of policy by the
and autonomy member states. European
of the central • Creation of the System of
bank. EMI (European Central
• It is forbidden Monetary Banks.
to finance Institute). • Entry into
public deficit. • Ban on the effect of the
• Increased co- granting of intra-EU

31
 operation central bank exchange rate
between central credit to the mechanism.
banks. public sector. • Entry into
• Free use of the • Increased co- force of the
ECU ordination of Stability and
• Improvement of monetary Growth Pact.
economic policies.
convergence • Strengthening
of economic
convergence
• Process leading
to the
independence
of the national
central banks,
to be
completed at
the latest by
the date of
establishment
of the
European
System of
Central banks.
• Preparatory

32
 work for Stage
Three.

Source:
http://www.cis.com.mx/pdf/wp_understanding_emu.pdf

Europe's new central bank has exclusive rights to au-

thorise the issue of banknotes within the Community but it will
share this actual role with national central banks. Member
states taking part in the monetary union are only allowed to
issue coins. The ECB has to approve the volume of money
issued. The ECB is regarded by many in the banking profession
as a duplicate of Germany's Bundesbank – it is actually based
in Frankfurt, Germany's financial capital. Like the Bundes-
bank, one of its main aims is to keep inflation under control
(Wynne, 1999).
Based on the Delors report, the European Council of
Madrid in 1989 decided that the first stage of the EMU would
begin in July 1990. The European Council of Maastricht in
December 1991 decided that Europe would have a single cur-
rency by the year 2002.
The establishment of the European Monetary Institute
(EMI) on January 1994 marked the start of the second stage of
the EMU and with this the Committee of Governors ceased to

33
exist. The EMI prepared the groundwork for the EMU. Its
transitory existence also mirrored the state of monetary in-
tegration within the Community. The EMI had no respon-
sibility for the conduct of monetary policy in the European
Union – this remained the preserve of the national authorities
– nor had it any competence for carrying out foreign exchange
intervention. Although it worked hard to discourage budget
deficits, its role to ban them altogether, failed.

The two main tasks of the EMI were (1) to strengthen

central bank cooperation and monetary policy co-ordination,
and (2) to make the preparations required for a) the esta-
blishment of the European System of Central Banks (ESCB), b)
the conduct of the single monetary policy and c) the creation of
a single currency in the third stage.
To this end, the EMI provided a forum for consultation
and for an exchange of views and information on policy issues.
Moreover, and it specified the regulatory, organisational and
logistical framework necessary for the ESCB to perform its
tasks in Stage Three.
The objectives of the Maastricht Treaty, the so-called 3
pillars, can thus be summarized as follows: (1) continuous
development of a single market and transformation into an
economical, political, monetary union with its own European
single currency by 1999 (2) introduction and development of a

34
common foreign and security policy (3) introduction and
development of co-operation in terms of law and order.
Furthermore, the Maastricht Treaty intends to (1) de-
fine new rights for European citizens (institution of European
citizenship) (2) include other matters concerning community
competence (consumer protection, public health, etc.) (3) allot
more powers to the European Parliament and European ci-
tizenship
As mentioned above, in stage 2, which begin in January
1994, a new European Monetary Institute prepared the ground
for the EMU, rearrangements were even harder to obtain, and
disproportionate budget deficits were to be discouraged but
not banned. Stage 3, in which swap rates were irretrievably
fixed and the single monetary policy began, was to start in
1997 if a majority of potential entrants fulfilled the “Maas-
tricht criteria”. Otherwise, EMU was to begin in January 1999
with whatever number of countries that met the criteria.
Finally, the practical activation periods foreseen in the
Delors Report were resumed and fixed by the Maastricht
Treaty on 7th February 1992 and this marked the end of the
Intergovernmental Conferences begun in 1990. The Maastricht
Treaty came into force on 1st November 1993 and underlined
the pledges of the member countries to prepare a path to Eu-
ropean Unification and establish the relative times and prin-
ciples.

35
 5. COSTS AND BENEFITS FROM THE INTRODUCTION
OF THE EURO AND BEING A MEMBER OF THE EMU

The benefits of the EMU to member countries are

mainly connected with the five Maastricht criteria (low interest
rates, low inflation, a stable monetary policy, a stable exchange
rate policy when we have one common monetary policy and
one currency, and a strict budgetary policy – limited debt/GDP
and deficit/GDP ratios). Membership in to the EMU allows
Member States to realize savings in three areas: reduced costs
due to the elimination of currency exchange; lower costs
created by healthy competition in the euro zone; and a more
favorable trading and investment environment for local busi-
nesses (European Commission, 1990). The implications for the
three main areas are as follows: a) Currency exchange: The
elimination of costs associated with currency exchange within
the euro area produce an estimated savings of up to one
percentage point of annual European Union GDP each year, b)
A single currency: The use of a single currency allows easier
price comparison across the participating Member States
which in turn stimulates competition. The ultimate winners
are Europe’s citizens and consumers, and c) Trade and in-
vestment: By eliminating the exchange rate risk, the Economic
and Monetary Union (EMU) brings increased business and
trading potential to commercial companies, especially small
and medium-sized enterprises (Masson et al., 1992).

36
 By eliminating the single market and creating more
efficient markets for goods and services, the euro raises the
competitiveness of the participating economies. Among other
things, it encourages a more rapid development of new pro-
duct lines, a faster implementation of new techniques in the
production process, and more investment in human capital.
Therefore, it stimulates growth of production, income and
employment, and restrains inflation.
Main benefits are related to such advantages as: eli-
mination of transaction costs; removal of exchange rate risk
from trade with other members of the euro area; improved
efficiency of financial and monetary markets; transparency of
prices for goods and services in euro area countries, which
promotes competition; improved distribution of resources;
and, generally, better economic integration (Melitz, 2000).
The introduction of the euro reinforces competition
between the Member States adopting the new currency. As
prices in all participating countries are expressed in euro,
transparency is enhanced which in turn strengthens com-
petition and certainly has an impact on price convergence, i.e.
very large price differences no longer are sustainable. How-
ever, just as prices for goods and services currently diverge on
a regional basis within Member States, some differences in
prices are likely to persist, as well. For example, it has to be
recognized that levels of indirect taxation may diverge between
Member States, thus resulting in differing price levels. Yet,

37
price differences are more difficult to sustain and tend to be
limited by variations in the level of transaction costs (Pain,
2002).
Given the size of the euro area, the euro plays an im-
portant role as an international currency. It is used extensively
in trade outside the euro area and should be seen as an
attractive alternative to the dollar. It is used very extensively as
a borrowing currency in corporate bond markets. It has also
been suggested that the euro will eventually play a significant
role in financial portfolios worldwide, and as a major reserve
currency. Therefore, the euro has the potential to stabilize the
international economic environment and promote interna-
tional trade. International investors have broader opportu-
nities to diversify their portfolios and to control their risks
(Pratti and Schinasi, 1999).
Apart from the benefits derived by EMU participation
of EU member countries, many benefits exist for companies,
too. First of all, the use of euro as a single currency stimulates
competition and leads to new product development, new pro-
duction methods, and a larger number of potential customers.
Secondly, many companies are able to produce their exports
with the use of the euro, in that way they reduce some ope-
rating costs (European Commission, 1990).
In addition to this, the Economic and Monetary Uni-
on’s (EMU) will bring small and medium-sized enterprises
(SMEs) with more choice and business opportunities. Many of

38
SMEs are made stronger and more competitive by the dis-
appearance of the exchange rate risk in most of the European
Union largest markets, the increased competition in the bank-
ing industry and the lower interest rates. Finally, SMEs are
provided with the possibility to sell their products and services
across a far wider area (economies of scale) to more potential
customers (Leblond, 2004).
Large companies operating across Europe will enjoy a
reduction in many of their costs, due to the elimination of
much of previous foreign exchange risk in the areas of treasury
management and foreign exchange transactions. Also, the im-
pact of the euro will be much wider and will affect employment
policies, pricing and marketing, and decisions on the location
of production and distribution centers. Competition in some
sectors will undoubtedly be stronger and with much greater
price transparency, the cost to consumers of certain goods in
certain markets may even be expected to fall (Rose, 2000).
The benefits of the Economic and Monetary Union
(EMU) for consumers are numerous, too. To mention a few:
reduced costs for travelling to other countries; easier and less
expensive transfer of funds to other countries; higher cost
transparency and increased competition which will lead to
lower prices; elimination of exchange rate risks among the
participating countries; low interest rates that reduce the cost
of borrowing; secured purchasing power through lower in-

39
flation; and more sustainable economic growth, which will
increase job security.
Table 4 presents the advantages of the EMU as dis-
cussed in the literature (Salvatore, 2002a; Salvatore, 2002b;
Endey, 1998; Leblond, 2004).

Table 4: Advantages from being a EMU member and from the

introduction of a common currency (EURO)
Advantages of the Advantages of the Advantages of
EMU for participating EMU for the EMU for
member states enterprises consumers
Exit from exchange Effectiveness in a Reduced costs
rate crisis (common larger market for travelling
currency) to other
countries
Fiscal policy and fiscal Reduction of Easier and less
interventions conduc- operation costs expensive
ted by national transfer of
governments funds to other
countries
Low restrained Windfall Faster growth
inflation advantages and of purchasing
opportunities in power (due to
many export lower
markets inflation). CEE

40
 consumer
purchasing
power grows to
match the
western
pockets.
Reduced costs due to Strategic Increased
the elimination of opportunities competition
currency exchange in which will lead
the EMU area to lower prices
Lower costs created by Lower charges for Elimination of
healthy competition in foreign exchanges exchange rate
the euro zone risks in the
EMU area
Favourable trading Enhanced Lower interest
profitability rates
Better Investment More investment Secured
environment for local opportunities purchasing
businesses power (stable
and low
inflation)
Prevention of Merger & Job security
counterfeiting, acquisition (more choices)
adoption and opportunities
implementation of the

41
company law
Stimulation of market Lower production Price
competition cost convergence
Improvement of Repackaging of Easier price
competitiveness of the products comparison
participating economies
More rapid Review of new Elimination of
development of new marketing time for
product lines strategies changing
currencies
Faster More choices and Economic
implementation of business stability
new techniques in the opportunities for
production process SMEs.
More investment in Disappearance of Reduction or
human capital exchange rate risk removal of any
in the EMU. differences in
the prices
among EMU
countries

Encouragement of Increased Saving the

growth of production competition in the costs of
banking system changing
and lower interest currencies
rates (lower

42
 lending/borrowing
cost)
Removal of exchange The euro area is Removal of
risk from trade with treated as one risks of
other members of the domestic market exchange rate
euro area fluctuations
Improved efficiency of Economies of scale More choices
financial and and better
monetary markets prices
Improved distri- Incorporation of New basis for
bution/allocation of innovation supporting
resources growth and
employment
Better economic Reduction in many Due to low
integration, Economic costs, especially interest rates,
stability for large more
companies investment
and growth
and thus job
creation
Broader opportunities Affect in Structural
to diversify portfolios employment reforms that
policies lead to job
creation

43
Stabilization of Lower prices for Protection of
international importing raw salaries
economic materials
environment
Euro an attractive Economic stability Movement of
alternative to the (better business labour
dollar. environment)
Price convergence, Removal of risks of Improved price
Stronger competition exchange rate transparency,
fluctuations in Greater price
trade in the EMU transparency
Transparency of prices Elimination of
for goods and services exchange rate risks
in the EMU area
Improvement of
employment rules
Improvement of
income, higher GDP
More confidence in
Europe’s economy
Source: Authors’ Research

On the other hand, EMU participation has some costs

for countries-members. The main disadvantages to member
countries of the EMU are summarized in Table 5.

44
 Table 5: Costs of participation in the EMU
EMU disadvantages
The risk of losing the monetary policy instruments. For
example, the exchange rate policy, or the monetary policy –
interest rate policy at national level.
Τhe inconsistency of the euro area economy or as often ex-
pressed the economic divergences between economies within
the euro area could challenge the viability of the EMU.
Currency zones should be compact and homogenous enough to
show little regional variation in business cycles, otherwise a
one-size-fits-all monetary policy will leave some regions lin-
gering in recession, while others grow so fast, they overheat
the zone.
The European Central bank (ECB) has been trying to chart a
middle course between slow- and fast-growing countries while
establishing its credibility as an inflation-fighter but the result
has been a monetary policy that is too “hot” for some, too
“cold” for others, and “just right” for almost no one.
Reduced autonomy in decision making process, as countries
have different backgrounds and needs.
The critics consider the “centralized blocks” as an outdated
concept in a world where globalization and localism are the
main competitive philosophies.
Consumers and businesses will have to convert their bills

45
accounts. Some costs will occur as banks and businesses need
to update computer software for accounting purposes, update
price lists, and so on.
Europe may not constitute an "optimum currency area" be-
cause the business cycles across the various countries do not
move in synchronicity.
In a recession, a country can no longer stimulate its economy
by devaluing its currency and increasing exports.
Previously, the anchor of the European Monetary System had
been the independence of the German Bundesbank and its
strong focus on price stability. Even though the European
Central Bank (ECB) is independent, it will have to prove its
independence in the future. This will, at the very least, incur
temporary costs as it will have to be extra-tough on inflation.
When other governments excert pressure on a government to
reduce borrowing, or even pay fines if the budget deficit ex-
ceeds a reference value, this may have the perverse effect of
increasing an existing economic imbalance or deepening a
recession.
The costs of adoption of all EMU norms and standards by enterprises

Finally, Angelov (2002) assumes that there are three

types of expenses: Costs for improvement of legislature, Costs
of compliance with European principles, and Costs for total
modernisation of the industrial potential. Ramos and Surinach
(2004) argue that the main cost of joining a currency area is

46
the risk of losing the monetary policy instruments. For ex-
ample, the exchange rate at the national level as stabilization
mechanisms against macroeconomic disturbances that affect
only one country in an area or effect countries in different
manners. His arguments are based on the fact that as the
macroeconomic disturbances known as “asymmetric shocks”
cannot be dealt with a common monetary policy, the achieve-
ment of macroeconomic stabilization would need alternative
adjustment mechanisms.

6. CONCLUSION

The European integration is a radical multidimensional

transformation of the European Region. Benefits from inte-
gration are multidimensional: political, economical and cul-
tural. This is also closely related to benefits from adoption of
acquis communautaire. At the macro-economic level the last
enlargement is expected to impact the growth rate of European
Union GDP, which in turn will be linked to the faster growth of
consumer incomes, purchasing power and correspondingly the
enhancement of market opportunities. On the other hand, EU
entrance is related to costs for country-members such as the
adoption of all EU norms and standards by enterprises, as well
as threatens to domestic producers’ market position. Another
cost refers to the reduced autonomy in countries’ decision-
making process.

47
 Deeper economic and monetary integration took place
through the establishment of the Economic and Monetary
Union (EMU) and especially in its third stage with the intro-
duction of Euro currency in 12 member countries. A signi-
ficant benefit, referring to country-members, is a stable eco-
nomic environment leading to low inflation and low interest
rates. The benefits are mainly connected with the five Maas-
tricht criteria (low interest rates, low inflation, stable monetary
policy, stable exchange rate policy when we utilize one com-
mon monetary policy and one currency, strict budgetary policy
– limited debt/GDP and deficit/GDP ratios. On the other
hand, EMU participation involves some costs for countries-
members. There are several types of expenses: costs for im-
provement of legislature, costs of compliance with European
principles, costs for total modernization of the industrial po-
tential. Moreover, one of the main costs of joining currency
area is the risk of losing the monetary policy instruments. For
example the exchange rate at national level as stabilization
mechanisms against macroeconomic disturbances that affect
only one country in an area or effect countries in different
ways.
It could be assumed that being a member of EU hides
many challenges, especially for less developed country mem-
bers. While the benefits are numerous regarding improve-
ments in every sector such as legislature, stability, security,
opening of new markets, challenges for new members are

48
various mainly related with the increased competition in EU
environment and the efforts that have to be done in order to
achieve EU standards. The cost of adoption of all EU norms
and standards, the transition cost and the reduced autonomy
in decision making are the main disadvantages that occur in
less developed countries. Due to these, there is a great fear of
migration of highly skilled and unskilled employees to more
developed countries as well as problems in domestic com-
petitiveness may appear.
Being a member of EU or EMU suggest facing a lot of
challenges, especially for small and less developed countries.
The benefits are numerous in case country members can ma-
nage to achieve real and nominal convergence. But at the
beginning of the membership, changes that have to occur in
less developed countries in every sector may create different
problems related to migration, unemployment, reduced auto-
nomy and reduced competitiveness. On the other hand, due to
Structural Funds these new member countries have an op-
portunity to achieve great improvements to infrastructure and
environment of enterprises, an opportunity that may not have
in other case. In the case of high developed countries the main
benefits are hidden behind the creation of the single market
and in that way the increase of FDI and trade flows, and
improved trade balance. Those advanced countries do not
receive funds from the European Union due to their existing
positive economic situation, but for them EU and EMU means

49
great development in a common market. The main disad-
vantage for them is that they elude their autonomy in decision
making.
It can be concluded that benefits exist for both de-
veloped and less-developed countries. In the first case, the
membership of developed countries establishes a climate of
security and growth of trade and FDI, by sacrificing their
autonomy in decision making. In the second case, challenges
are numerous since less developed countries may have the
chance to become better although due to great differences with
developed countries, may not manage to catch up the right
moment.

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