During the stage of the customs union, exchange rate variations are still possible and, to a certain extent, desirable, because the member states conserve the autonomy of their economic policies and can, by means of those variations, adjust their economies to the new conditions of competition prevailing between themselves and with the rest of the world. During the stage of the common market, however, the exchange rate variations become more and more inconvenient for the partners. While equal conditions of competition should prevail in a common market, the devaluation of the currency of a Member State could provide a competitive advantage to its industries, whereas the revaluation of the currency of another Member State could handicap its exports. In fact, the devaluation of the currency of a country which is a member of a common market could have an equivalent effect to imposing customs tariffs on all imported products and subsidising that country's exports. Conversely, the revaluation of a member country's currency would mean restricting its exports and encouraging its imports, factors which could get in the way of business expansion in countries with strong currencies.
A single market without a single currency is exposed to monetary and economic problems. On the monetary level, because of the possibility of upward or downward change in the value of certain currencies of the member states, there is an exchange risk in the event of credit sales to a business in a partner country, and this greatly restricts credit exports in member states. Indeed, an exchange rate adjustment, even a moderate one, may substantially alter the contractual obligations of firms operating in the different member states and at the same time affect the relative wealth of citizens and the purchasing power of consumers.
Currency fluctuations can penalise both investors who have financed their foreign investments by exporting capital from their countries and those who have had recourse to the resources of the host country. In the first case, devaluation of the currency of the country in which the investment took place or revaluation of the currency of the investor's country erodes the repatriated capital and profits. In the second case, devaluation in the investor's country or revaluation in the host country means higher amortisation and therefore a greater investment cost than expected. These risks could hinder businesses from investing in partner countries or from borrowing in them capital needed for their investments. Exchange risks, thus, would limit interpenetration of financial markets and therefore economic growth in a single market without a single currency.
From the economic point of view, if the common market were divided into autonomous markets as a result of divergent economic policies followed by the member states, the anticipated advantages, in particular economic growth and economic stability, would be greatly reduced. In reality, the interdependence of the economies of members of a common market accelerates the transmission of cyclical fluctuations and of the effects of measures intended to deal with them. Attainment of the economic objectives of a member state depends to a large extent on economic conditions in the other member states. An unfavourable economic situation in one member state leads to a reduction in its imports from the other members of the common market, which are affected in turn. On the other hand, a favourable economic situation in one member country has positive effects on the economies of the others and feedback effects on the former. If there were no coordination of economic policies, the differences in economic development - which would take the form of high interest rates in some member states and low rates in others and, conversely, of low exchange rates in the former and high exchange rates in the latter - could result in undesirable capital movements, that is to say from the poorest to the richest countries.
Negative effects can also ensue from divergences in national short-term economic policies. If, for example, a member state wished to pursue a deflationary policy by raising interest rates, whilst another member state followed an expansionist policy with low interest rates, capital would emigrate, for short-term investments, from the second country to the first and prevent the attainment of the objectives of both. Even if they pursued the same objectives, but by different means, two member states of a common market without a single currency could bring about undesirable movements of capital. If, for example, in order to pursue a deflationary policy, a state imposed quantitative restrictions on credit, whilst another raised interest rates, capital from the first might go to short-term investment in the second, causing balance of payments problems in the first and inflationary pressures in the second.
The semi-integration, or imperfect integration, which characterises a common market, generates situations that are unstable and in the long term intolerable for member states' economic policies. Those policies are no longer sufficient for regulating short-term economic situations because, firstly, some of their causes lie abroad and, secondly, some economic policy instruments are already beyond the control of the national authorities, including customs duties, import restrictions and export incentives [see sections 5.2 and 23.1]. It can be seen that the increasing interpenetration of the economies in a common market leads to a dwindling of the independence of national short-term economic policies. This means that the economies of the member states of a common market cannot be managed effectively by national authorities, i.e. the appropriate ministries and the central banks of those states. It becomes manifest that the loss of autonomy of the national economic and monetary policies of the member states of a common market needs to be counterbalanced by the establishment of a common economic and a single monetary policy. Hence, the member states of a common market that want to complete it need to pass to the next stage of multinational integration, which is that of economic and monetary union.
If economic conditions in the common market are to resemble those in an internal market, it is first and foremost necessary to eliminate exchange rate adjustments, which disrupt trade and investment by affecting in an unpredictable way their profitability. To this end, the member states of a common market must agree the full and irreversible conversion of their currencies at fixed parities or, better, adopt a single currency. In either case, they need to establish a monetary union within which transaction costs (the costs of foreign-exchange transactions or the costs of exchange rate cover) would disappear altogether. The second possibility, however, which was rightly preferred by the EU, has some additional advantages. The single currency permits a genuine comparison of prices of goods and services within the single market. It is one of the main exchange and reserve currencies in the world and it allows Europeans to pay for their imports from third countries in their own currency, without the intermediation of the dollar.
In other words, the single currency is a necessary attribute of a genuine single market. This is the reason why, in view of the completion of the single market, the Member States of the Community decided, in December 1991, in Maastricht to pursue the path of economic and monetary union. By greatly facilitating the functioning of the single market, the single currency should provide a stable macroeconomic environment, which would be of considerable benefit to businesses. Under ceteris paribus conditions, this environment should normally foster trade, improve the allocation of resources, encourage savings and investments, thus enhancing economic growth.
Certainly, all these benefits would be derived from the economic and monetary union under certain conditions, notably the engagement of all participating states to scrupulously observe certain criteria ensuring monetary stability, price stability, sound public finances and, thus, sustainable growth. The single currency would thus mean the loss of monetary independence of the countries participating in the final stage of the EMU and even some loss of their economic independence, notably because the exchange rate instrument could not be used anymore by one of these countries experiencing particular difficulties [see section 1.1.2]. However, due to the integration already attained in the common market, the manipulation of the exchange rate could provide only a temporary relief to this country and would create problems to the other members of the common market. Indeed, in order to create the conditions of a single market, the partners would already have adopted a great number of common policies and, thus, would have lost a good deal of the possibility of autonomous management of their economies. The loss of national autonomy inside a common market would have to be compensated by the development of collective disciplines in the economic and monetary fields. This is the objective of economic and monetary union.
Furthermore, the convergence of economic policies of the member states is necessary not only for the good functioning of the single market, but also in order to face the problems of globalisation. In fact, in a context of globalisation of the markets, of interdependent economies, of freedom of goods and capital movements, a totally autonomous economic policy is no longer possible. The member states of a common market, even if they had no legal obligation, would have anyway an interest in coordinating their economic policies, in order to face the problems of globalisation. Hence, the countries participating in an EMU lose prerogatives, which in practice they could no longer use. On the other hand, thanks to the EMU, they have a collective responsibility with regard to economic and monetary policies of the union and may better use their collective economic and monetary force in order to further their interests in the global market.