Monetary policy is an area of deep integration within the European Union. The single currency, the euro, is a daily reminder for EU citizens in 15 of the member states and one of the leading world currencies.
We start by looking at the introductory treaty provisions, which lay the foundations for economic and monetary union (EMU).
Treaty on European Union
The preamble of the current Treaty on European Union (TEU) contains the following recital:
“RESOLVED to achieve the strengthening and the convergence of their economies and to establish an economic and monetary union including, in accordance with the provisions of this Treaty, a single and stable currency,”
(Source: the latest consolidated version of the treaties, Officcial Journal of the European Union, OJ 29.12.2006 C 321 E/9.)
The objectives of the European Union (EU) are set out in Article 2 TEU (ex Article B), with economic and monetary union mentioned in the first indent (OJ 29.12.2006 C 321 E/11):
Article 2 TEU
The Union shall set itself the following objectives:
— to promote economic and social progress and a high level of employment and to achieve
balanced and sustainable development, in particular through the creation of an area without
internal frontiers, through the strengthening of economic and social cohesion and through the
establishment of economic and monetary union, ultimately including a single currency in
accordance with the provisions of this Treaty,
Treaty establishing the European Community
Article 2 of the Treaty establishing the European Community (TEC) singles out the common market and the economic and monetary union (EMU) among the common policies and activities designed to achieve the laudable objectives of the European Community (EC):
Article 2 TEC
The Community shall have as its task, by establishing a common market and an economic and
monetary union and by implementing common policies or activities referred to in Articles 3 and 4, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.
(Source: OJ 29.12.2006 C 321/44.)
Article 4 TEC presents the guiding principles for the economic and monetary union (EMU), with the introduction of the single currency outlined in paragraph 2. The name of the currency has since changed from ‘ecu’ to ‘euro’, and the single currency has been introduced in 15 member states.
Here is the text of Article 4 TEC (ex Article 3a), as reproduced in the latest consolidated version of the treaties, Official Journal of the European Union (OJ) 29.12.2006 C 321 E/45─46):
Article 4 TEC
1. For the purposes set out in Article 2, the activities of the Member States and the Community shall include, as provided in this Treaty and in accordance with the timetable set out therein, the adoption of an economic policy which is based on the close coordination of Member States' economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.
2. Concurrently with the foregoing, and as provided in this Treaty and in accordance with the timetable and the procedures set out therein, these activities shall include the irrevocable fixing of exchange rates leading to the introduction of a single currency, the ecu, and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition.
3. These activities of the Member States and the Community shall entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments.
Article 8 TEC (ex Article 4a) sets out the main institutional rules for monetary policy, with the establishment of the European system of central banks and the European Central Bank (OJ 29.12.2006 C 321/47):
Article 8 TEC
A European system of central banks (hereinafter referred to as ‘ESCB’) and a European Central Bank (hereinafter referred to as ‘ECB’) shall be established in accordance with the procedures laid down in this Treaty; they shall act within the limits of the powers conferred upon them by this Treaty and by the Statute of the ESCB and of the ECB (hereinafter referred to as ‘Statute of the ESCB’) annexed thereto.
The foundations have been laid, before we turn to the detailed treaty provisions on monetary policy.