Harvard Business School

9-799-131
May 4, 2001

European Monetary Union

In the spring of 1999, Romano Prodi, newly designated chairman of the European Commission, prepared to help create an economically integrated Europe. Since the introduction of the euro on January 1, Europe had been operating with a single currency—at least for business-tobusiness transactions. Despite some technical problems with the changeover and an 8% depreciation of the euro against the dollar, this extraordinary step toward integration had gone fantastically well. Western Europe continued to experience healthy growth—in excess of 2% annually—and the Commission was expanding its plans to further integrate Europe’s markets. But before real integration could be achieved, many more reforms would be needed. While the Commission recently concluded that “thanks to the Single Market Programme, today’s European 2 product markets work much better than they did in the 1970s,” they still exhibited wide price differentials, diverse regulations, and a lack of inter-European investment and competition. Capital markets had moved further, as members of the European Union had dropped regulations and encouraged competition across national borders. But even here, prices and margins remained high, and inter-European rationalization had only just begun. Finally, the markets for labor had barely begun to integrate. Here, high minimum wages, payroll taxes, unemployment benefits and diverse restrictions on flexibility had pushed Europe toward an employment crisis. Unemployment for the EU-11 had exceeded 11% for more than six years (Exhibit 1).

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Markets,” 1998. 1999, p. 2.

1 The European Commission, “Economic Reform: Report on the Functioning of Community Product and Capital 2 The European Commission, “Economic and Structural Reform in the EU (Cardiff II),” Brussels, February 17,

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