Does the Single EU Market Really Require a Single Currency?

Scientific Essay, 2009

22 Pages


Table of contents


Part I – the Evolution of the Single Market and the Single Currency
1.1 Origins and Development of the Single Market
1.1.1. The Single Market Complete or Not Complete, That is the Question
1.2. Origins and Development of the EMU and the Euro

Part II – Evaluation of the Euro’s Successes and Failures in Furthering the Single Market Objective
2.1. Benefits – the Euro Furthering the Single Market Objective
2.1.1. Economic Benefits
2.1.2. Political Benefits
2.1.3. Social Benefits
2.2. Costs – the Euro Counteracting the Single Market Objective
2.2.1. Persisting National Divergences
2.2.2. Breakdown in Fiscal Coordination and Spillover Effects




Part I of this paper will illustrate that although the currency union signified the next significant step along the European integration ladder that was built already back in 1958, it must be recognised that the single market is not yet fully established in Europe.[1] Hence the phrasing of the title question suggests the reading of whether or not the single currency is absolutely necessary for the completion of the single market. Part II is dedicated to the central aim of this paper, namely to assess to what extent the common currency furthers, or indeed counteracts, the achievement of the fundamental single market objective. While this essay goes to lengths in highlighting the desirability of the single currency and its many benefits that help further the achievement of the single market, it does however maintain that the currency union is not absolutely necessary for the establishment of the common market. Indeed, as has been noted, “it is possible to have a single market without a single currency”.[2] Furthermore, as will be shown in the forthcoming sections of Part II, there are even situations in which the single currency might be harmful to the single market and to the Union. Although the answer to the title question of whether a single currency is really required must necessarily be in the negative since the single market could potentially exist without the euro, this essay will conduct an extensive evaluation of the successes and failures of the euro and the Economic and Monetary Union (EMU) to further the single market objective in order to illustrate that the euro has nonetheless both enabled it to function much more efficiently and helped to bring European economic and political integration to previously unknown levels. In this sense the single market does not necessarily require a single currency, but the euro will nevertheless be hugely important in furthering its establishment.

Part I – the Evolution of the Single Market and the Single Currency

In order to determine the extent to which the euro has furthered the achievement of the single market, it is necessary to establish the origins and evolution of both the common market and the common currency.

1.1 Origins and Development of the Single Market

The creation of a single market is one of the fundamental objectives and aims of the Community, and it is enshrined in Article 2 of the EC Treaty, which also sets out the goal of ensuring the free movement of the four freedoms of goods, persons, services and capital. Since 1958 the internal market project has developed into one of most “significant symbols of European integration”[3] and the history of the EU is largely defined by the ever increasing economic, political and social integration that has ensued as a result of the single market objective.[4] Although rather swift successes were achieved within the free movement of goods, illustrated by for instance the creation of the European Customs Union in 1968, the progress on the other three freedoms was much slower.[5] The Commission’s White Paper of 1985 marked a new decisive move towards the completion of the European single market, and it set out legislation proposals for the removal of physical, technical and fiscal barriers that still existed within the Union.[6] The determination to complete the internal market was further enhanced following the publication of the Cecchini Report 1988, which quantified the benefits that would arise from the single market.[7] The most decisive step was taken through the deadline that was set in the Single European Act (SEA) that came into force 1987, whereby the internal market should be completed by 31 December 1992.[8] The 1990s witnessed a move towards a more holistic conception of the single market, with a balance being struck between economic and social integration.[9]

1.1.1. The Single Market Complete or Not Complete, That is the Question

Although the necessary legislation has been enacted within the member states and the “pieces for the single market programme are in place”[10], it is rather interesting to note that the EU itself does not appear to be quite sure as to whether the 1993 deadline of completion of the single market was met or not. A highly inconsistent document published by the EU in 2004, first states that the “the single market was completed in 1993”[11]. However, this is then moderated and the same document states that even though the project was declared complete, it was still “not quite finished”[12] and it is ultimately concluded that a lot remains to be done before the internal market is fully achieved.[13] The notion that the single market is not yet fully integrated is also observed in other EU publications.[14] There is no question about the fact that the full freedom of movement of all four freedoms has not been achieved in Europe as of yet, and EU admits that “markets within the euro area are still only partly integrated and cross-border provision of services remains underdeveloped.”[15] However, following the establishment of the EMU and the euro, the Union claims to have reached stage five out of six on the Community scale of economic integration, leaving only “Complete economic integration” still to be met.[16] The central question addressed by this paper is whether the common currency will help the Community to reach this final step of complete economic integration, as well as general European integration.

1.2. Origins and Development of the EMU and the Euro

According to Optimal Currency Area theory, which is used as a systematic way of evaluating whether it makes sense for states to enter into a monetary union, the EU is in fact not considered an optimal currency area.[17] This is because the Union fails to meet two of the essential criteria set out by the optimal currency area theory: the first one is labour mobility, which is of central importance within a monetary union since it has the potential to offset the costs incurred by having surrendered national monetary policies by absorbing the economic shocks that hit the union.[18] In spite of the efforts of the single market project, the labour mobility remains restricted in the EU and this criterion is consequently not fulfilled.[19] The second criterion that the Community fails to meet concerns centralised insurance fiscal transfers amongst member states that could act to compensate for adverse economic shocks by automatically compensating the affected state.[20] Since the EU lacks a centralised fiscal insurance mechanism this criterion is simply not met. Although many economists have consequently concluded that the EU does not constitute an optimal currency area[21] it is important to realise that the existence of the euro can alter this conclusion because the optimal currency area criteria can be seen as endogenous, meaning that “that they will be increasingly fulfilled over time as citizens and governments learn to live with a common currency.”[22] Furthermore, since the optimal currency area theory is a solely economic analysis of the suitability of a monetary union, whereas in reality, the decision to join EMU is heavily influenced by political motivations, the usefulness of the theory is somewhat limited. Moreover, irrespective of whether the EU theoretically constitutes an optimal currency area or not, the forthcoming sections will illustrate that the euro has most certainly thrived in the Community, and vice versa.

It is possible to trace the Community’s move towards EMU almost back to the origins of the EC itself; monetary union emerged as a Community objective already in the late 1960s.[23] The first step towards monetary integration was taken in 1979 with the establishment of the European Monetary System (EMS), which instigated the Exchange Rate Mechanism (ERM) and the European currency unit, the Ecu.[24] The aim of the EMS was to create monetary stability following the breakdown of the Bretton Woods regime by fixing exchange rates through the ERM, an aim that was successfully met.[25] A significant factor in the move towards EMU in particular was the Delors Report of 1988, which examined how the EMU could be gradually brought into existence.[26] It was later decided that EMU would be realised in three stages, with the first one – convergence and removal of persisting restrictions on free movement – starting in 1990. EMU was established in Maastricht in 1992, and Article 4(2) of the Treaty of the European Union (TEU) stipulates the irrevocable fixing of exchange rates and the introduction of the single currency. The TEU further identifies price stability as a primary objective of the EMU. The second stage began in 1994 and saw the creation of the European System of Central Banks (ESCB) and the coordination of national monetary policies, combined with the formulation of a common monetary policy.[27] The fact that member states voluntary incurred the cost of surrendering the important economic instruments of national exchange rates in favour of a common monetary policy set by the independent European Central Bank (ECB) – the centrepiece of the European monetary policy – marked an historical event in European integration.[28] In fact, the loss of national monetary policies that can absorb economic shocks has been identified as the greatest cost of entering into the EMU.[29] The final stage of EMU was initiated in 1999 and it consisted of the irrevocable locking of exchange rates and the launch of the euro. In order to become a member of the EMU, the countries needed to meet the convergence criteria that were set out in Article 121(1) TEU, which imposed restrictions on inflation rates, budgetary deficits, exchange rate fluctuations and interest rates. The fulfilment of the convergence criteria was deemed necessary in order to smooth out national divergences that would otherwise have rendered the EMU unstable.[30] The launching of the EMU and the common currency has been one of the key defining moments in the creation of a Community marked by closer integration and coordination in which the internal market can flourish.[31]


[1] Fontaine “Europe in 12 Lessons” Office for Official Publications of the European Communities, 2004, p. 32.

[2] Craig and De Búrca EU Law – Text, Cases, and Materials, 4th Edition, Oxford University Press, 2008, p. 736.

[3] Civitas Fact Sheet on the European Single Market, September 2007,

[4] European Commission Online – Economic and Financial Affairs; The Euro

[5] Murphy “European Union Financial Developments: The Single Market, the Single Currency, and Banking” FDIC Banking Review, 2000, p. 3.

[6] COM(85)310, para 10.

[7] Leonard The Economist Guide to the European Union, 9th Edition, Profile Books Ltd., 2005, p. 118.

[8] SEA para 14.

[9] Op. Cit. Craig and de Búrca (2008): p. 633.

[10] Op. Cit. Murphy (2000): p. 6.

[11] Op. Cit. Fontaine (2004) p. 24.

[12] Op. Cit. Fontaine (2004) p. 30.

[13] Ibid. p. 32.

[14] European Commission Report “EMU @ 10: Successes and Challenges After 10 Years of Economic and Monetary Union” European Economy, No. 2, 2008, p. 10. See also Op. Cit. Civitas (2007).

[15] Op. Cit. European Commission Report “EMU @ 10” (2008): p. 6. See also Fontaine “Europe in 12 Lessons” Office for Official Publications of the European Communities, 2006, p. 30, where the limitations in the freedom of movement of labour are highlighted.

[16] Op. Cit. European Commission Online – Economic and Financial Affairs; The Euro.

[17] Baldwin and Wyplosz The Economics of European Integration, 2nd Edition, McGraw-Hill Education, 2006, p. 351. See also De Grauwe The Economics of Monetary Integration, Oxford University Press, 2005, p. 90.

The analysis of optimal currency area theory in this essay is necessarily restricted due to space limitations. For extensive analysis of the theories, please see Op. Cit. Baldwin and Wyplosz (2006) and Op. Cit. de Grauwe (1992 and 2005).

[18] Lane “The Real Effects of European Monetary Union” Journal of Economic Perspectives, Vol. 20, No. 4, Autumn 2006, pp. 47-66, p. 60.

[19] Crawford One Money for Europe? The Economics and Politics of EMU, Macmillan Press Ldt., 1996, p. 98. See also Op. Cit. Fontaine (2006): p. 3 and Op. Cit. Baldwin and Wyplosz (2006): p. 356 and 365.

[20] Op. Cit. De Grauwe (2006): p. 222, See also Op. Cit. Baldwin and Wyplosz (2006): p. 352 and 378.

[21] Freiden “The Euro: Who Wins? Who Loses?” Foreign Policy, No. 112, Autumn 1998, pp. 24-40, p. 31.

[22] Op. Cit. Baldwin and Wyplosh (2006): p. 367. See also Op. Cit. Lane (2006): p. 47 and p. 52.

[23] Bini-Smaghi and Padoa-Schioppa and Papadia The Transition to EMU in the Maastricht Treaty, Princeton University Printing Services, 1994, p. 4. See also Op. Cit. Crawford (1996): p. 13.

[24] Gallen “Does Europe Need A Monetary Union?” Trinity College Dublin, 1996, viewed at

[25] Balden-Hovell “The Creation of EMU” in Artis and Nixson The Economics of the European Union – Policy and Analysis, 4th Edition, Oxford University Press, 2007, p. 249-250.

[26] Op. Cit. Gallen (1996).

[27] Op. Cit. Craig and de Búrca (2008): p. 729.

[28] De Grauwe The Economics of Monetary Integration, Oxford University Press, 1992, p. 5 and 37. See also Op. Cit. Freiden (1998): p. 39.

[29] Dornbusch and Jacquet “Making EMU a Success” International Affairs, Vol. 76 No. 1, 2000, pp. 89-110, p. 94. See also Micco and Stein and Ordonez “The Currency Union Effect on Trade: Early Evidence from EMU” Economic Policy, Vol. 18, No. 37, October 2003, pp. 315-356, p. 317.

[30] Op. Cit. Crawford (1996): p. 203. This paper shall return to the matter of potential instability resulting from divergences within member states in Part II.

[31] Almunia, European Commissioner for Economic and Monetary Policy, Speech/08/242, “Economic and Monetary Union: 10 Years On”, Delivered at the Brussels Economic Forum 2008, 15 May 2008. See also Op. Cit. European Commission Online – Economic and Financial Affairs; The Euro.

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Does the Single EU Market Really Require a Single Currency?
University of Edinburgh  (School of Law)
Economics and Policy of European Integration
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does, single, market, really, require, single, currency
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Veronica Hagenfeldt (Author), 2009, Does the Single EU Market Really Require a Single Currency?, Munich, GRIN Verlag,


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