Economic and monetary union (EMU) was a goal for the EU proclaimed as far back as the 1960s, but one which was not pursued with much vigour or success until the late 1980s, when the Single European Act added a chapter to the treaties formally setting the EU on the road to EMU.
Not only is EMU a logical economic counterpart to the SEM, but it is also a major political milestone on the way to EU integration: currencies (and to a lesser extent, the conduct of economic policy) have long been central symbols of national sovereignty.
The process of EMU began with a number of unsuccessful attempts to coordinate exchange rates. The first exchange rate system was known as 'the snake' and was set up in 1972, but it collapsed by 1974. The first exchange rate mechanism (ERM) was set up in 1979, as part of the establishment of the European monetary system (EMS), which also set up a common fund for market interventions and created the European currency unit (Ecu) as a reserve asset and means of settlement.
However, the success of the EMS was hindered by the weakness of policy instruments available to implement it, disagreements as to the priority of the economic or the financial, a lack of convergence between member states' economies and varying degrees of enthusiasm for the project.
EMU has progressed through three stages since 1990, to the present day, where 17 member states have a common monetary policy run by the European central bank and use the Euro as their currency.
1. Stage 1 began in 1990, with the EU committing itself to removing all barriers to free capital markets
2. Stage 2 began in 1994. This transitional phase saw member states working to bring about economic convergence in terms of price stability, long term interest rates and exchange rates. It also committed member states to keeping their levels of public debt below 60 per cent of GNP and keeping their budget deficits below three per cent of GNP. During Stage 2, the European Monetary Institute was set up to strengthen economic co-operation, and as a precursor to the European System of Central Banks, itself the precursor to the European Central Bank.
3. Stage 3 began in 1999, when the single currency (renamed 'Euro' from Ecu in 1995) came into effect. The UK, Denmark, Sweden and Greece did not move to Stage 3 – the first three because they chose not to participate, Greece because it did not meet the convergence criteria. Greece later joined the Eurozone in 2001.
The Euro did not replace national currencies until 2002, but from 1999, the following rules were imposed on the members of the 'Eurozone'.
Exchange rates between member states were irrevocably fixed.
Control of monetary policy was ceded to the European Central Bank, whose primary guiding principle in practice has been stifling inflation.
Macroeconomic policies were brought into line through the stability and growth pact.
Those member states outside the Eurozone are still nonetheless expected to co-ordinate their macroeconomic policies with that of the Eurozone.
There are currently (2011) 17 members of the Eurozone, the newest being Estonia, Slovakia, Cyprus and Malta.