ABSTRACT

This chapter describes the set-up chosen for the European Monetary Union and the criteria for membership. Effective monetary integration imposes constraints on national macro-economic goals. It discusses the forms these constraints on national policy take in terms of budgetary deficits, government indebtedness and so on. The chapter deals with the workings of the Economic and Monetary Union (EMU). It also discusses the independent monetary policy by the European Central Bank (ECB) and the coordination of fiscal of the member countries. A monetary policy that restricts the money supply to keep inflation low may be frustrated by price increases of imported goods as a result of wage inflation in the partner country. Monetary integration is the best way to commit national governments to take the necessary measures of economic policy to curb inflation. The design and implementation of monetary policy in the euro area is the exclusive preserve of the European Central Bank.