card's

Banking and Finance (2)

2008-06-20T07:18:00.000-07:00

Fair Lending/Community Banks.
Clinton proposed steps to make banks lend more money and provide more services in depressed inner-city neighborhoods. On July 15 the president submitted to Congress his Community Development Banking proposal to stimulate credit flow to inner cities. The measure included an expenditure of some $382 million through fiscal 1997 to establish and expand nontraditional lenders in disadvantaged neighborhoods.
Comptroller Ludwig pressured banks through tougher enforcement of the 1977 Community Reinvestment Act, a measure designed to make more loans available to minorities living in depressed areas. The law was intended to prevent banks from accepting deposits in such areas without making loans available there. Some bankers and federal bank examiners complained that Ludwig was pressuring them to make risky loans. But evidence continued to mount that a black borrower with the same financial profile as a white borrower was more likely to be turned down for credit by a bank. A group founded by consumer activist Ralph Nader accused 49 mortgage lenders of discrimination. A study by Timothy Bates of the New School for Social Research found that black-owned construction companies were denied loans more frequently than similar white-owned firms.

Bank regulators and the Department of Housing and Urban Development instituted testing programs to uncover lending bias and said they would refer any evidence of discrimination to the Department of Justice for prosecution. In December the Clinton administration proposed tough new rules to insure compliance with the Community Reinvestment Act. Objective measurements would be used to evaluate whether a bank's lending patterns in specific neighborhoods were biased when compared with its own overall lending patterns and competitors' lending patterns, whether a bank was investing in a community's growth, and whether it was offering a full array of services. Banks that were found to be flouting the law could face fines or other sanctions.
In November, for the first time, the Federal Reserve blocked a large bank merger because of concerns over possible bias in mortgage lending, preventing Shawmut National Corporation from acquiring New Dartmouth Bank. In December the Justice Department settled its year-old lending discrimination case against Shawmut; the bank's chief executive said Shawmut would renew its application to buy the New Dartmouth Bank.
Nonbank Competition.
Despite high profits in 1993 the long-term outlook for banks looked dim because of a loss of market share to unregulated competitors like finance companies, brokerage houses, and mutual funds.
Bankers were particularly alarmed at the growth of nonbank issuers of credit cards. As of March 31, 13 of the top 50 credit card issuers were owned by nonbank companies. Citicorp continued to reign as the largest credit card issuer, with $36.8 billion in revolving credit outstanding, but the Chase Manhattan Corporation yielded second place to Discover Card Services Inc., issuer of the Discover Card, with $15.2 billion in revolving credit outstanding. Previously, Discover was the only nonbank card among the top ten. But by the end of the first quarter of 1993, Discover was joined by three other nonbanks. One of these was Household International, Prospect Heights, IL, which issued the cobranded General Motors MasterCard (every time a purchase is made with the cobranded card, a percentage of the purchase price is rebated in the form of a credit toward the purchase of a new GM car); Household International had $6.9 billion in revolving credit outstanding. The other two nonbanks were American Express Travel Related Services, Inc., with $6.7 billion, and American Telephone & Telegraph Company, with $6.6 billion. Reacting to the growth in competition, banks began looking for cosponsors of their own. Citicorp cobranded a Visa credit card with the Ford Motor Company.
As far as was legally possible, banks pursued customers who were turning to mutual funds. The Glass-Steagall Act, passed during the Great Depression, prohibits banks from underwriting funds; however, banks can sell funds underwritten by others and can serve as fund advisers, thereby reaping fees. Since the late 1980s over 100 banks have started their own mutual fund families, with the banks serving as advisers. By mid-1992 banks accounted for over 14 percent of all stock and bond mutual fund sales. In the 12 months ended June 30, 1993, banks increased the mutual fund assets they managed by 36 percent, to $190.9 billion. That outpaced the 23 percent growth recorded by the mutual fund industry overall, to $1.8 trillion in assets.
In 1993, Wells Fargo & Company permitted ATM cardholders who also owned its mutual funds to purchase additional shares, transfer money between funds, or sell shares and transfer the proceeds into a bank account. In another sign of the mutual fund push, Bankers Trust Company linked up in August 1993 with discount broker Charles Schwab Corporation to sell mutual funds to the corporate retirement-plan market. Then, in December, Pittsburgh-based Mellon Bank Corporation acquired the Dreyfus Corporation, the sixth-largest U.S. mutual fund company. Once the deal was completed, Mellon would derive 60 percent of its annual revenue from mutual fund fees rather than from interest on loans.
The increased mutual fund activity by banks worried some members of Congress; they were concerned that bank customers might not realize that funds marketed by banks were not guaranteed by federal deposit insurance funds. In October, House Banking Committee Chairman Henry B. Gonzalez (D, Texas) and Representative Charles E. Schumer (D, New York), a member of the banking panel, introduced a bill to regulate fund sales by banks. The banking industry opposed the plan, claiming it would add to government red tape already diluting industry profits.
President Clinton proposed to save $4.3 billion by having federally guaranteed student loans be made directly through the Education Department. The president said the system whereby the government paid private lenders such as banks to provide the loans was needlessly expensive for students. Protests by the banking industry did not fall on deaf ears, and the legislation that was eventually passed allowed for a test of the program: The Education Department would be permitted to make up to 50 percent of guaranteed student loans for a period of five years. In 1998, Congress would have the option of expanding the program.
Bank Mergers.
Banks' loss of market share to unregulated competitors caused a flurry of bank mergers in 1993. The third quarter of the year was the biggest deal-making period since the third quarter of 1991, when mergers were announced between BankAmerica Corporation and Security Pacific Corporation and between Chemical Banking Corporation and Manufacturers Hanover Corporation. Deals in the third quarter of 1993 totaled $6.6 billion, compared to $3.3 billion in the second quarter. The fourth quarter of 1993 featured the largest single deal since 1991, with the $3.8 billion merger of Society Corporation of Cleveland, OH, with Keycorp of Albany, NY.
BankAmerica, which cut 20,000 jobs following its 1991 merger, announced plans in late October 1993 to eliminate 3,750 more jobs, or 3.8 percent of its work force, by the end of 1994, because of the weak California economy. The new cuts were expected to save about $250 million in annual expenses.
S&L Bailout.
The government cleanup of failed savings and loan associations seemed imperiled for most of the year because of congressional reluctance to provide the Resolution Trust Corporation, the agency in charge of the bailout operation, with additional funds. Critics claimed the RTC was inefficient and inept. A report by the agency's own inspector general revealed that the accounting firm Price Waterhouse and Company, working as a subcontractor for the RTC in a San Diego thrift, had billed the agency 67 cents per copy for copying over 11 million documents at that one institution, resulting in a cost overrun of millions of dollars. As a result of such criticism, Albert V. Casey, chief executive officer and president of the RTC, resigned on April 1 after 17 months on the job. (Late in the year, after four months of waiting for the Senate Banking Committee to schedule confirmation hearings, his proposed successor, Republican real estate developer Stanley Tate, withdrew his nomination. His lack of success was attributed to a number of causes, including the disinclination of some Democratic senators to confirm a contributor to Republican campaigns.)
The Clinton administration initially sought $42 billion to complete the cleanup of failing S&Ls but agreed to accept less in the face of opposition from both the Senate and House. Late in the year a congressional committee brokered a compromise between versions of the legislation. The compromise measure finally adopted called for $18.3 billion to finish the S&L cleanup.
International Banks.
European banks, meanwhile, were still suffering from the same asset quality problems that had hobbled their American counterparts a few years earlier and from a lingering recession. Crédit Lyonnais, a French state-owned bank, turned in one of its worst performances in 20 years. Analysts said credit problems at Bank Nederland, its Dutch subsidiary, contributed to Crédit Lyonnais's problems.
A British bank, Barclays, reported the first loss in its 97-year history in March, when it was compelled to reserve 2.6 billion pounds sterling against doubtful credits and, as a result, was forced to cut its dividend.
Banks in Sweden were rocked by bad news. At the end of June the Swedish government paid $50 million to cover an interest payment missed by Swedbanka, one of Scandinavia's biggest banks. Earlier, the government had to take over and bail out Gotabanken and Nordbanken. Also in June, Italy's Ferruzzi group announced its inability to meet obligations to lenders. More than 100 banks, including some of the largest U.S. and European institutions, were unable to recover hundreds of millions of dollars in loans.
Internationally, there was much fretting by regulators about the risks of the $6 trillion derivatives market. In this market banks trade interest income produced, or derived, from securities in their portfolios, such as stocks, bonds, currencies, or commodities, to help protect themselves from interest rate fluctuations. Anxious to avoid more regulation, the Group of Thirty, a Washington, DC, think tank representing some of the biggest international banks, called for its members to voluntarily adopt more rigorous accounting standards and to make additional disclosures about their derivative activities. When the banks appeared to be ignoring the recommendations, they received a stern warning from the U.S. Federal Reserve Board that governments would act if they did not.
The movement toward economic union in Europe prompted France in July to privatize two state-owned banks, Banque Nationale de Paris, one of its largest financial institutions, and Société Nationale Elf Aquitaine, a small, retail bank. Only members of the European Community were permitted to have more than a 20 percent stake in the privatized banks, prompting protests from the United States that France was engaging in protectionism.
Cross-border acquisitions also picked up in Europe. France's Crédit Lyonnais, the world's eighth-largest bank, acquired Bank für Gemeinwirtschaft, a German bank. Commerzbank, another German institution, acquired Paris-based Caisse Central de Réescompte.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

Banking And Finance (1)

2008-06-20T07:13:00.000-07:00

Archives consist of articles that originally appeared in Collier's Year Book (for events of 1997 and earlier) or as monthly updates in Encarta Yearbook (for events of 1998 and later). Because they were published shortly after events occurred, they reflect the information available at that time. Cross references refer to Archive articles of the same year.
1993: Banking And Finance
Historically low interest rates in 1993 helped the U.S. banking industry achieve record profits and provided an escape hatch for debt-laden consumers. Rates on 30-year mortgage loans fell to under 7 percent, the lowest since the 1960s.
There was a downside to the good news, however. Congress appeared unable to pass legislation needed to modernize the banking industry, possibly setting the stage for a round of industry consolidation and failures later in the decade. And low yields drove savers who usually relied on bank accounts backed by government guarantees into riskier instruments such as mutual funds in order to maintain adequate returns. Returns on six-month certificates of deposit dropped below 3 percent. Five-year CD rates fell below 4.5 percent in October. Meanwhile, the assets of stock mutual funds rose 22 percent during the first half of the year, to $580.4 billion, and bond fund assets were up 16 percent, to $673.1 billion.
Defendants in various banking scandals made news again during the year, including Clark Clifford and Robert Altman, both of whom had been charged in 1992 in connection with the Bank of Credit and Commerce International (BCCI) case.
In Europe the year saw many banks beleaguered by credit problems and the effects of recession.
Prime Rate.
Slow economic growth kept interest rates in the United States at their lowest levels since the 1950s. On October 18, Morgan Guaranty Trust Company cut its prime rate, the rate it charges to its best customers, to 5.5 percent, down half a percentage point. A Morgan spokesman said the bank decided on the hefty cut because there was growth in loan demand, low inflation, and a spread of three percentage points between the Federal Reserve Board funds rate (the rate at which banks can borrow money overnight) and the prime — a very big spread by historical standards. Analysts had been expecting banks to cut the prime rate, which had lingered at 6 percent since July 1992, but only by a quarter of a percent. A brief sell-off of bank stocks followed Morgan's action, as analysts predicted a drop in bank profits because of lower rates on loans. However, most of the rest of the banking community declined to follow Morgan's lead.
Bank Profits.
Overall, the more than 11,000 commercial banks in the United States enjoyed a banner year in 1993. The industry reported $10.4 billion in earnings during the second quarter, just $455 million below the record earnings of the first quarter. The third quarter saw a new record as earnings reached $11.5 billion. For the first nine months of 1993 banks earned $32.6 billion, $8.5 billion more than in the corresponding period in 1992. Citicorp, the largest U.S. banking company, saw its third-quarter earnings triple to $528 million, a remarkable performance for a bank believed to have been on the Federal Deposit Insurance Corporation's list of troubled banks in 1991.
As a result of the strong earnings bank stocks generally outpaced the market, and shareholders saw dividends in the first half of the year mount to $8.7 billion, 50 percent more than in the same period of 1992.
Federal Deposit Insurance Fund.
The surge in profits reduced strains on the Federal Deposit Insurance Corporation's Bank Insurance Fund. In August 1993 the fund reported a balance of $6.8 billion and a reserve ratio of 35 cents for every $100 of insured deposits. At the end of 1992 the fund had reached negative $100 million. In addition, during 1993 the FDIC was able to repay the U.S. Treasury a $2.5 billion line of credit it had requested in 1991, when the outlook for banks was far more dismal.
Many banks that had been in danger of failing recovered because of the low interest rates. By December 15, 1993, 42 banks with $3.8 billion in assets had failed, compared to 120 banks with $44.2 billion in assets the previous year. The number of troubled banks was down by 125 in the third quarter of 1993, for a total of 664. The FDIC estimated total costs to the fund for the year at $500 million, compared to $7 billion in 1991 and $4.7 billion in 1992. Total assets at problem banks dropped by $75 billion in the first nine months of 1993, to $379 billion.
Because of the turnaround the FDIC estimated that it would reach its congressionally mandated reserve ratio of $1.25 for each $100 in deposits as early as 1996. Earlier estimates had the fund reaching the required level in 2002.
Consumer Debt.
The low interest rates also enabled consumers to strengthen their balance sheets. With rates for 30-year mortgages under 7 percent for the first time in nearly 25 years, many people refinanced mortgage loans and used the savings to pay down more expensive debt. They also used home equity loans, with their tax-deductible interest rates, to replace other forms of borrowing. Data published by American Banker in June showed that credit card loans at commercial banks fell in 1992 for the first time since 1981. Total card loans outstanding fell 1.9 percent, to $136.4 billion. Mortgage loans rose 8.2 percent, to $390.1 billion, and home equity loans rose by 4.3 percent, to $73.3 billion.
Credit Crunch.
Lawmakers, especially those from the depressed New England states, were angry that banks were not making more new loans in the face of record profits. They were especially disturbed by reports that small businesses in their states could not secure lines of credit. Banks blamed the situation on weak customer demand because of the soft economy, new sources of corporate financing, and burdensome laws passed by Congress in 1991 in reaction to a spate of bank failures. (These laws require banks to maintain very high levels of capital, thus reducing funds that would otherwise be available for loans.)
Surveys by the National Federation of Independent Business showed that borrowing by its 600,000 members was at a 20-year low because of concerns about the economy. As a result, President Bill Clinton announced a credit crunch initiative on March 10, when he introduced proposed new banking regulations meant to reduce paperwork and give bankers incentives to lend once again. Comptroller of the Currency Eugene A. Ludwig, regulator of national banks, established an appeals process for bankers unhappy with the grading of loans by federal bank examiners. Ludwig, the de facto head of the FDIC during 1993, also limited that agency's ability to examine banks regulated by the Office of the Comptroller of the Currency. This move, although unpopular with the FDIC, was praised by bankers, sometimes subjected to multiple examinations by federal regulators in a given year.

American Express Company (2)

2008-06-20T07:11:00.000-07:00

IV
INTERNATIONAL BANKING SERVICES
During World War I (1914-1918) the U.S. government nationalized and consolidated express deliveries on American railroads, eventually forcing American Express to discontinue its express business in 1918. In an effort to maintain steady revenues, American Express diversified by offering international banking services in 1919. After steady but relatively modest overseas growth during the 1920s and 1930s, the company dramatically increased the number of its offices around the world during the late 1940s and 1950s.
V

AMERICAN EXPRESS CARD
In 1958, eight years after Diners Club came out with the first credit card that could be used at a variety of establishments, American Express introduced its own credit card. The American Express credit card offered cardholders the convenience of being able to buy goods and services without needing cash at the time of purchase. The company generated revenues by charging cardholders an annual fee and by receiving a small percentage of card purchases from participating businesses. American Express did not charge cardholders interest for using the card, but it required them to pay their balances in full each month. Within three months of the card’s introduction, half a million people became American Express cardholders. In less than ten years, 2 million people carried American Express credit cards and annual charges on those cards exceeded $1 billion.
VI

DIVERSIFICATION
During the 1960s, 1970s, and early 1980s American Express grew into a global financial giant, acquiring a number of companies, including Fireman’s Fund Insurance Company in 1968 (which it sold in 1985) and the brokerage firms Shearson Loeb Rhoades Inc. in 1981 (which later grew into Shearson Lehman Brothers Holdings Inc.), Investors Diversified Services in 1984, and E. F. Hutton in 1987.
In 1987 the company introduced the American Express Optima credit card to compete with the growing popularity of cards issued by competitors MasterCard and Visa. Unlike its original American Express credit card, the Optima card did not require cardholders to pay their balances in full each month. Instead, like MasterCard and Visa, the Optima card allowed cardholders to pay balances in installments, plus interest.
VII

RECENT DEVELOPMENTS
In the late 1980s and early 1990s a downturn in the U.S. economy, coupled with increased competition from other credit card companies, led to a sharp decrease in earnings for American Express. In 1991 the company initiated a major reorganization at a cost of $110 million. At the same time American Express invested $155 million in a reserve to cover expected losses from its various credit lines.
Harvey Golub took over as chairman of American Express in 1993. Golub sold many of the company’s holdings and cut millions of dollars in costs. Earnings at the company rose steadily during the mid-1990s, as American Express broadened its credit card business, strengthened its investment-services group, and expanded its international business holdings. The number of American Express cardholders grew from 26 million in 1993 to 59 million in 2001.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

American Express Company (1`)

2008-06-20T07:08:00.000-07:00

I

INTRODUCTION
American Express Company, financial and travel services company based in New York City. American Express invented the traveler’s check and introduced one of the first credit cards in the United States. These financial services established American Express worldwide and helped build the company into a multibillion-dollar corporation with dozens of subsidiaries.
II

FOUNDING
American Express began in 1850 in New York City as a company that transported valuables. It resulted from the merger of three rival express transport companies: Wells & Company; Butterfield, Wasson and Company; and Livingston, Fargo and Company. Henry Wells served as the first president of American Express and William G. Fargo was the vice president. In addition to their duties at American Express, Wells and Fargo began a separate company two years later, Wells Fargo & Company, which provided express delivery and banking services to California.
American Express prospered in the 1850s by transporting money and other valuables on rail and steamship lines in areas north and west of New York. The company grew even larger during the American Civil War (1861-1865) by transporting supplies, parcels, and other items for the Union Army.
III

MONEY ORDERS AND TRAVELER’S CHECKS
Fargo became president of American Express after Wells retired in 1868. Fargo died in 1881 and was succeeded as president by his brother, James Fargo, who further expanded the business. He guided the introduction of the money order in 1882 and the traveler’s check in 1891. Most money orders could be issued and redeemed only in banks or post offices, which distinguished them as exceptionally reliable draft notes—or certificates negotiable as money—for a variety of personal and business transactions. The American Express traveler’s check was a draft note purchased from a bank or directly from American Express. It could be redeemed for goods or services in many businesses around the world.
The American Express traveler’s check was an immediate success with travelers who found that the checks were easier to redeem than letters of credit from banks, which were commonly used overseas instead of cash. In addition, travelers preferred American Express traveler’s checks because the company would reimburse them if the checks were lost or stolen. Traveler’s checks provided a substantial infusion of revenue to the company, and helped establish the American Express brand name among American travelers.

Getting the Best Exchange Rate When You Travel Abroad

2008-06-20T06:43:00.000-07:00

Travel writer and consumer advocate Ed Perkins offers travelers some advice on how to lower their costs while exchanging currency. He recommends using a credit card and an ATM card to avoid the high exchange rates that are usually attached to travelers checks and the fees charged by currency exchanges.
Getting the Best Exchange Rate When You Travel Abroad
By Ed Perkins
Finding the best ways to exchange currency has always been one of the most nettlesome questions for foreign travelers. However, these days the widespread use of plastic money—credit cards and debit ATM cards—makes the question much simpler.
The best strategy for exchanging currency today may be summed up in two basic rules: Put as much of your foreign expenses on a credit card as you can, and use your ATM card whenever you need to get cash. With a little bit of background and research, you can spend more of your money on travel and less on fees.
Getting the Best Exchange Rate When You Travel Abroad
As a visitor to a foreign country you will always lose at least a little in the process of exchanging currency. Your objective is to keep that loss as low as possible. Here are some facts about currency exchange that may surprise you:
* On a retail transaction—exchanging United States currency or travelers checks for foreign currency at a bank or exchange office—you usually lose from 4 to 8 percent on the transaction. You will lose even more if you exchange currency at a hotel.
* You won’t lose less money by exchanging currency in the United States before you leave. In fact, U.S. bank rates are usually worse than bank rates overseas. Buying travelers checks in a foreign currency before you leave home doesn’t help matters: You will simply take the loss here when you buy them instead of taking it overseas when you cash the checks.
* When you use a credit card or a debit ATM card in a foreign country the least you can lose is the (approximately) 1 percent fee that the international MasterCard and Visa networks charge to make the actual exchange. With American Express and Diners Club the fee is about 2 percent.
* When you charge a foreign purchase to a bank credit card, such as MasterCard or Visa, all you lose with some cards is the 1 percent the issuer charges for the actual exchange. Other banks, however, add a surcharge of 2 to 3 percent on transactions in foreign currencies. The decision whether or not to surcharge is up to the bank that issues the card, not MasterCard or Visa. Some of the big banks that don’t surcharge are Capitol One, HFC, and US Bank. Among those that do surcharge are Chase, Citibank, First USA, and Providian. Even with a surcharge, however, you generally lose less with a credit card than with currency or travelers checks. American Express and Diners Club don’t surcharge beyond the 2 percent fee.
* When you use a debit card, such as Cirrus or Plus, to withdraw foreign cash, the conversion fee is 1 percent, the same as with a credit card. In addition, you pay a fee, established by your bank, for each withdrawal. The typical fee for an overseas withdrawal is 2 to 3 dollars, although a few banks charge more; you pay the same fee, no matter how much or how little you withdraw. A few small banks offer “no-fee” ATM cards to attract business.
* When you use a credit card to get foreign cash, the withdrawal is treated as a cash advance, and you are immediately subject to interest charges in addition to the 1 percent conversion loss and a fee of 3 dollars or more.
A basic strategy for exchanging currency
Take maximum advantage of your credit card and debit ATM card by following this basic strategy:
* Use a credit card to lose the least on your foreign purchases. By researching the different cards before you leave on a trip, you can keep your losses to around 1 to 2 percent.
* For the cash you need, keep your losses to a minimum by withdrawing foreign currency with an ATM debit card. If you withdraw in amounts of $200 or more, the percentage loss is small. If you use a credit card to withdraw cash, you’ll lose a lot more. Don’t use a debit card for small withdrawals.
* Don’t use travelers checks as your primary means of foreign payment. But do take along a few $20 checks or bills to exchange at retail for those last minute or unexpected needs.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

Corporate Finance

2008-06-20T06:37:00.000-07:00

I

INTRODUCTION
Corporate Finance branch of economics concerned with how businesses raise and spend their money. Companies spend or invest funds in projects that might make the firm more profitable, such as a new factory or an improved product. Corporate finance involves selecting projects that maximize profits and make the best use of a company's funds. Sometimes businesses can fund these projects on their own. Other times businesses must raise funds from outside the company. Corporate finance also involves finding the best way for businesses to pay for their projects.
II

CORPORATE OWNERSHIP
Small businesses may be owned by a single individual, but major corporations are far too large to be owned in this way. Instead corporations are owned by many people, called shareholders, who own shares of stock. Investors purchase stock because it allows them to share in the company's profits, although there are no guarantees that the company will be successful. Each share of stock represents ownership of a portion of the firm and its possessions, or assets. For example, Exxon Corporation has about 600,000 shareholders, who together own a total of about 1.2 billion shares of stock.
Shareholders who possess a large number of shares own a larger portion of the company than those who possess only a few shares. For example, an individual who owns one share of Exxon stock owns just under one-billionth of the company. At the other extreme, a large financial institution, such as an insurance company or a company that manages investments, may own several million shares of Exxon stock. About half the shares of large corporations are owned directly by individuals. The other half are owned by financial institutions.
Shares of stock are bought and sold on a number of stock exchanges. For example, Exxon's shares are regularly bought and sold on the New York Stock Exchange. At the end of 1995 Exxon's shares were priced at $80 each. At that price it would have cost about $100 billion to buy all of Exxon's stock.
Although a corporation's shareholders own the company, they do not manage it. Instead they elect a board of directors who hire key company executives and review their job performance.
III

INVESTMENT DECISIONS
Corporate investment decisions often involve substantial amounts of money. Many investment decisions are also difficult to reverse and can affect the company's business far into the future. For example, in 1966 Boeing Company, an airplane manufacturer, decided to invest about $1 billion to develop the 747 jumbo jet. This investment delivered long-term benefits as the company was still selling the jets 30 years later. It was also able to take advantage of its experience with the 747 to develop new kinds of aircraft.
A business regards an investment as successful if it increases the wealth of the shareholders who own the company. This is accomplished when the firm earns profits and passes them back to the shareholders either in the form of dividends or as increases in the value or price of the stock. Dividends are a share of profits paid to shareholders as cash or as additional shares of stock. Profits or earnings that are not distributed to shareholders stay with the firm and are called retained earnings. These earnings influence the value of the stock because they increase the total asset value, or total amount of assets, of the firm. Because the value of their company's possessions has increased, the shareholders own stock that is worth more. If the firm realizes retained earnings of $1 per common share, it will add $1 to the value of each share. However, since many forces influence stock prices, the actual price of the stock will probably fluctuate and be more or less than the additional $1 per share.
Investment decisions—that is, deciding what projects to invest in—are based on two criteria: the expected rate of return and the risk or uncertainty of achieving the expected rate of return. The project's rate of return, or simply its return, is a measurement of its profit. A financial manager estimates the return based on forecasts of potential sales, expenses, and profits that might occur from an investment. For example, a company might have an opportunity to invest in a project that costs $100 million. If the project is expected to produce a profit of $10 million, this equals a rate of return of 10 percent on the investment of $100 million.
Before evaluating the rate of return, a financial manager must also consider the return's risk. The manager must consider the chances of earning or losing money on the project and how great the profits or losses could be. For example, if the company has a 90 percent chance of earning the $10 million return, the risk is rather small. On the other hand, if the company has only a 5 percent chance of earning the $10 million return, the project is very risky. Expected rates of return are higher with risky projects because they must compensate for the project's uncertainty to attract investors. Although their returns are not guaranteed, higher risk projects have a potential for greater profit.
Whether or not the company should go ahead with the project depends on what the $100 million could earn if invested differently. The company should accept any project that is expected to earn a higher return than shareholders can earn with another investment. For example, the shareholders could invest their $100 million by buying real estate. If the shareholders could earn a 20 percent return on their real estate investment, they are giving up that opportunity to invest in the company. In other words, 20 percent is the cost of investing their capital in the project, or the cost of capital. The firm should only accept projects whose expected return exceeds the shareholder's cost of capital.
In addition to investing in projects, firms also buy and sell entire businesses. Sometimes this takes place with a mutual agreement to merge or combine two companies into one. In other cases one firm, the buying firm, goes against the wishes of another firm's management, the target firm, and attempts a takeover. For example, a company can appeal directly to the target firm's shareholders by offering to buy their stock. If the buying firm acquires enough of the target firm's stock, it can control the target firm's activities.
IV

RAISING MONEY FOR INVESTMENTS
Investments require cash. There are three common ways a corporation may be able to raise this cash: (1) by paying smaller dividends, (2) by borrowing, or (3) by selling more stock. Each method has advantages and disadvantages.
A firm can finance projects by paying smaller dividends. By paying out less of its profits in dividends, the company can keep more of its profits as retained earnings and use them to fund its investments. Using retained earnings to finance projects appeals to managers because they can avoid paying interest. However, the shareholders may not like it if their dividend becomes smaller. Also, sometimes the firm needs more money for a particular project than it has available in retained earnings.
A company can also choose to borrow money to fund its projects. A firm can either borrow from a bank or directly from investors by issuing bonds. Although a firm must pay interest if it borrows money, it can deduct the interest from its profits and therefore pay less in taxes. However, there are limits to how much a firm can borrow, and too much borrowing could lead to bankruptcy.
Selling stock is a third way companies can raise funds. Unlike a loan, the funds received from the sale of stock belong to the company and do not have to be repaid. As a consequence, the firm does not have the expense of paying interest. However, the firm must still earn a certain return on its investment to obtain the cash to pay dividends or devote to retained earnings. Businesses also may not want to issue stock because the costs of issuing stock, such as fees for legal and banking services, are usually higher than for issuing bonds.
A financial manager must consider factors other than cost when deciding how to raise money. For example, if a firm tries to raise new funds, the public will speculate about the company's plans. If investors think the plans are a bad idea the company's stock price could fall.
International financial markets have become increasingly important sources of funds. United States firms frequently raise money in overseas financial centers such as London or Tokyo. Loans from abroad often have a lower interest cost to domestic U.S. corporations because foreign banks are not subject to the restrictions of the U.S. Federal Reserve System. For example, instead of borrowing dollars from a bank in the United States, American firms may borrow dollars that have been deposited in London or Tokyo banks. These are known as Eurodollars. Eurodollars are U.S. dollars held in banks outside of the United States. Similarly, instead of issuing bonds in the United States, U.S. firms may issue bonds in a foreign country to a group of international investors. These are called Eurobonds. Eurobonds are bonds sold outside the country whose currency is used to write the bond. For example, a bond denominated in U.S. dollars issued by a Japanese bank is a Eurobond.
V

MANAGING RISK
Events outside the control of a corporation can affect the firm and its financing decisions. For example, a change in the interest rate can suddenly make borrowing money very inexpensive or very costly. From 1975 to 1995, interest rates in the United States were as high as 15 percent and as low as 3 percent. Many economic factors, such as changes in the price of oil or the price of foreign currency, can affect businesses as well.
Corporate financial managers need to make sure that potential economic fluctuations do not threaten the firm. A variety of tools, known as derivatives, help manage the risk of such events occurring. Four important kinds of derivatives include (1) futures, (2) forwards, (3) options, and (4) swaps. Futures are promises to buy or sell something in the future at a price that is agreed upon today. For example, a candy manufacturer might commit to purchasing a specified quantity of cocoa at a specified price from the producer in six months. Futures are traded on organized futures exchanges, such as the Chicago Mercantile Exchange or the Chicago Board of Trade. Forwards are similar to futures, but they are arranged directly between a firm and a bank. Options give a firm the right to buy or sell something in the future at a price that is agreed upon today. For example, if the candy-manufacturer does not know how much cocoa will be needed in six months, it could take out an option to buy cocoa at a certain price. Swaps involve firms swapping one set of payments for another. For example, an American firm may agree to make a series of dollar payments to a Japanese bank, while the bank in return promises to make a series of yen payments.
Derivatives are very popular. For example, worldwide trading of futures amounts to about $35 trillion a year. Most firms use derivatives to reduce risk, but some use them to speculate by buying and selling derivatives in hopes of earning a profit. When these speculations don't work out, losses can be substantial. For example, the United Kingdom's Barings', one of the world's oldest banks, collapsed in 1995 when futures speculation by one of its traders in Singapore resulted in losses of over $1 billion.
Methods of corporate finance continually evolve as financial managers invent new ways to raise money and avoid risk. Smart investment and financing decisions are crucial to a firm's success.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

Citigroup Inc.

2008-06-20T06:29:00.000-07:00

I

INTRODUCTION
Citigroup Inc., world’s leading financial services firm. Formerly known as Citicorp, the company merged with Travelers Group, an insurance, brokerage, and banking company, in 1998 to form a single company called Citigroup. It is the holding company for Citibank, one of the biggest banks in the United States and the world’s largest issuer of bank credit cards. Citibank is a global, full-service banking company that provides corporate and personal financial services in more than 100 countries and territories.
Citigroup’s other subsidiaries include brokerage firm Smith Barney and Primerica Financial Services, which offers life insurance, mutual funds, and consumer loans. Citigroup is based in New York City.
II

EARLY HISTORY
Citibank traces its roots to the first bank to be chartered (authorized) by the federal government, the Bank of the United States, founded in Philadelphia, Pennsylvania, in 1791. When the federal government did not renew the bank's charter in 1811, Colonel Samuel Osgood took control of the New York branch and reorganized it as the City Bank of New York. The bank operated primarily as a source of credit for merchants.
To create a market for government bonds to raise money for the American Civil War (1861-1865), the U.S. Congress established the first national banking system in 1863. City Bank acquired a national charter and became the National City Bank of New York (NCB). Under the leadership of James Stillman in the late 1890s, NCB became a prime lender to big corporations.
By 1909 NCB was the nation’s largest bank, with over $300 million in assets. In 1914, after the Federal Reserve Act allowed federally chartered banks to open branches overseas, NCB opened an office in Buenos Aires, Argentina, becoming the first national U.S. bank with a foreign department. In 1928 the bank became the first commercial bank to offer personal loans. At the time, commercial banks did most of their business with corporations and government agencies, and savings banks handled the consumer market.
In 1955 NCB merged with the First National Bank of New York and became the First National City Bank of New York. The new bank became known as Citibank, based on the designation NCB had chosen as its telegraph address in 1866. The name became official in 1974. Citibank pioneered the use by banks of holding companies (corporations that exist only to hold the shares of another company) in order to expand nonbanking activities, creating First National City Corporation in 1967. It was renamed Citicorp in 1974.
III

INNOVATION AND EXPANSION
In 1961, to compete with government bonds, Citibank invented the certificate of deposit (CD), a form of savings account that pays a higher rate of interest in exchange for a longer time commitment by the investor. In the 1970s Citibank became a leader in issuing Visa and MasterCard credit cards. By 1980 it had issued cards to 6 million people in the United States. That same year, the company moved its credit card operations to South Dakota, where state law allows banks to charge a higher rate of interest than New York state law.
In 1981 Citibank surpassed Bank of America (present-day Bank of America Corporation) as the largest U.S. bank. However, during the late 1980s Citibank reported billions of dollars in losses due to loans to developing countries and the economic downturn of the commercial real estate market in the United States. The revenues from Citibank’s many foreign franchises helped the company quickly regain profitability, and it remained the largest U.S. bank into the 1990s.
The 1996 merger of Chase Manhattan Corporation and Chemical Bank Corporation, both of New York, unseated Citibank as the largest bank in the United States. That same year, the United States Department of Justice (DOJ) began investigating Citibank’s involvement with the brother of former Mexican president Carlos Salinas de Gotari. In 1995 the Mexican government charged Raul Salinas with “illicit enrichment” after tracing numerous overseas accounts to him. The DOJ sought to determine whether Citibank violated U.S. money-laundering laws by helping Salinas move nearly $80 million from accounts in Mexico to Switzerland. The United States Government Accounting Office reported in 1998 that Citibank violated its internal regulations when it failed to run a background check on Salinas and did not verify the source of Salinas’s money.
IV

RECENT DEVELOPMENTS
In 1998 Citicorp announced plans to merge with Travelers Group to create a $700 billion company (based on assets) called Citigroup. Travelers Group, founded in 1864, was the first company in the United States to sell accident insurance. It later offered life insurance, annuities, liability, and, in 1897, the first auto insurance policies. In the late 1970s and early 1980s the company started to acquire financial services firms. In 1993 entrepreneur Sanford Weill bought Travelers Group and made it the holding company for his other firms, which included Commercial Credit, Primerica Financial Services, and Smith Barney. He retained the Travelers Group name and its red-umbrella logo. In 1997 Travelers Group’s Smith Barney merged with investment firm Salomon Brothers to create Salomon Smith Barney. The division later reverted to the name Smith Barney.
Federal regulators approved the consolidation of Citicorp and Travelers Group, valued at approximately $70 billion when announced, in 1998. The merger gave each company’s shareholders 50 percent of the combined enterprise. The merger was largely a failure, however, and in 2002 the company decided to spin off one of the principal components of the deal, Travelers Property Casualty Corp.
In 2003 Citigroup faced an investigation by the New York State attorney general into allegations that its stock analysts issued fraudulent reports on companies in an effort to gain their investment banking business. In a settlement the company agreed to pay a $400 million fine and to separate its stock research from its investment banking business. In addition, one of its former stock analysts was banned from the securities business for life.
In 2005 Citigroup announced that it would spin off another component of the Travelers Group by selling Travelers Life & Annuity to the insurance giant MetLife Inc. for about $11.5 billion. The sale would make MetLife the largest individual life insurer in North America. As part of the deal, MetLife agreed to make some of its products available through Citigroup distribution channels, such as Smith Barney and Citibank branches.

Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

Visa International

2008-06-16T12:50:00.000-07:00

I INTRODUCTION
Visa International, credit card and payment system company based in Foster City, near San Francisco, California. Visa is the world’s largest consumer payment company, with more than one billion cards issued, more than $1.8 trillion in transactions annually, and more than half of the world’s market in transactions. Visa is collectively owned by more than 21,000 member financial institutions around the world. These institutions issue Visa cards, and each establishes the terms that it will offer to consumers, such as rates and fees.

II ORIGINS
Visa traces its roots to 1958, when Bank of America, based in San Francisco, issued the BankAmericard (see BankAmerica Corporation). At the time, many banks in the United States offered charge cards, or cards that enabled consumers to charge goods and services to an account. Banks required cardholders to then pay their account balances in full each month. Unlike charge cards, the BankAmericard offered cardholders credit privileges, so they could pay their balance over a longer period of time in increments, plus interest. Bank of America licensed the card throughout California and eventually in other states as well.
The BankAmericard suffered from transactions problems and fraud during the early 1960s because of unreliable interchange systems between Bank of America and other banks licensed to issue the card. In 1968 Dee Ward Hock, an executive of the National Bank of Commerce in Seattle, Washington, headed a committee of BankAmericard licensees that was formed to resolve the problems among credit-card issuers. Two years later Hock was instrumental in creating National BankAmericard Inc. (NBI), a consortium of BankAmericard licensees designed to conduct more reliable transactions between the banks. NBI bought the domestic bankcard system from Bank of America, and Hock became the head of NBI. By 1970 the BankAmericard and its biggest competitor, Master Charge (later MasterCard), were offered nationwide, and most banks had eliminated their own bankcard programs to join one or both of the national systems.

III VISA CARD INTRODUCED
In 1974 Hock formed IBANCO, which took over administration of BankAmericard’s foreign operations. In 1977 Hock changed the name of the BankAmericard to the Visa card. NBI became Visa U.S.A. and IBANCO became Visa International. Visa International Incorporated became the umbrella organization for Visa’s business units. Visa International and Visa U.S.A. share corporate headquarters in Foster City.

IV GROWTH
In 1977 MasterCard held 60 percent of the bankcard business, compared with 40 percent for Visa. By 1983 those percentages were reversed, making Visa the leading U.S. credit card. Credit-card use expanded dramatically in the 1980s, and Visa continued to dominate the market. Visa had 56 million cardholders worldwide in 1979, but that figure rose to 220 million ten years later.
Credit-card use continued to grow in the 1990s as businesses ranging from supermarkets to health care providers began accepting payment with cards. Visa also offered premiums, such as airline discounts, for using its card. The number of Visa cards worldwide increased from 255 million in 1990 to more than one billion in 2000. The company’s revenues grew from $720 million in 1990 to $1.8 billion in 2000.
Of the more than $1.6 trillion in credit-card transactions worldwide in 1996, 55.8 percent used a Visa card, making it the worldwide leader in the credit-card industry.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

VISA

2008-06-16T11:21:00.000-07:00

I INTRODUCTION
Visa, formal endorsement placed by government authorities on a passport, indicating that the passport has been examined and found valid by the nation to be visited, and that the bearer may legally go to his or her destination.

II ENTRY VISA
An entry visa signifies that the bearer has received official permission to enter a country as a visitor; it does not, however, guarantee admission. Entry visas serve the general purpose of enabling a government to limit and control the entry of aliens into a country. These visas are of two general types: the passport entry visa, which is issued to persons who wish to enter a country for a visit of stated duration, and the immigration entry visa, which is issued to persons who want to enter and settle permanently in the country.
In the U.S., the requirement of entry visas became an integral part of the immigration system in 1917. Prior to that year aliens were permitted to enter the United States without a visa but were subject to exclusion on various grounds. The immigration laws were strengthened by Congress during World War I, when strict control over the entry of aliens was deemed essential to curtailing enemy espionage and sabotage. Several enactments passed since 1918 have fully defined the visa requirements for both immigrants and nonimmigrants and have rendered them increasingly stringent. Racial restrictions on the immigration and naturalization of aliens were removed and provision was made for the immigration of defectors from Communist countries by the terms of the Immigration and Nationality Act of 1952. American consular officers may refuse entry visas to aliens only on specific grounds set forth in the immigration laws, including mental defects, affliction with a dangerous contagious disease, conviction for crimes involving moral turpitude or illicit narcotics traffic, fraud or willful misrepresentation in procuring a visa, membership in certain proscribed organizations, and prospective activities in the U.S. believed prejudicial to the public interest or dangerous to the welfare, safety, or security of the nation.
Aliens applying to U.S. consular officials abroad for immigration entry visas are normally required to present documentary evidence of their status as responsible and law-abiding citizens of their own country. They must submit to a mental and physical examination and establish their eligibility to receive an immigrant visa. Numerical limitations have been levied on the number of aliens who may immigrate to the United States each year. Certain classes of aliens, including the spouses and children of U.S. citizens, are exempt from numerical limitations. See Immigration; Immigration and Naturalization Service.

III EXIT VISA
Some nations require that their own citizens obtain exit visas—that is, government authorization to leave the country—before traveling or settling abroad. Exit visas are frequently required by countries in which unfavorable political, social, or economic conditions have resulted in a marked rise in emigration. By restricting exit visas, such countries can check or even halt the flow of emigrants. Notable among the governments that instituted the use of exit visas were the Fascist regime in Italy, from 1922 to 1943, and the National Socialist regime in Germany, from 1933 to 1945. China and a number of other countries have continued this practice to the present time.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

CREDIT CARD, DO YOU FAMILIAR WITH IT?

2008-06-16T11:14:00.000-07:00

Credit Card, card that identifies its owner as one who is entitled to credit when purchasing goods or services from certain establishments. Credit cards originated in the United States in the 1930s; their use was wide-spread by the 1950s. They are issued by many businesses serving the consumer, such as oil companies, retail stores and chain stores, restaurants, hotels, airlines, car rental agencies and banks. Some credit cards are honored in a single store, but others are general-purpose cards, for use in a wide variety of establishments. Bank credit cards, now also in use in Europe, are examples of the general purpose card. Establishments dispensing almost every form of product or service are honoring such cards, and it is predicted that credit cards might some day eliminate the need for carrying cash.
When a credit card is used, the retailer records the name and account number of the purchaser and the amount of the sale, and forwards this record to the credit card billing office. At intervals, usually monthly, the billing office sends a statement to the cardholder listing all the charged purchases and requesting payment immediately or in installments. The billing office reimburses the retailer directly.
Most of the work involved in credit card operations is now handled by computers. Charges for the use of a credit card are sometimes paid directly by the cardholder, and sometimes borne by the retail establishments that accept them. In the latter case, the cost is absorbed into the price of the merchandise. Department stores usually charge interest to credit customers who do not settle their bills within a month, but certain credit plans do not charge interest until a bill has been outstanding for several months. Interest rates for overdue balances are regulated by state law. A continuing problem involved in the use of credit cards is the ease with which they can be used fraudulently if stolen or lost, although the liability of the owner is limited.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

2008-06-13T00:03:00.000-07:00

coba apakah ini berhasil

yah sapa tau ada yang bisa

Top Ten Credit Cards in UK

2008-06-12T19:50:00.000-07:00

Here are top ten credit cards in UK taht very familiar and used by many UK people:
1. EGG CARD (www.new.egg.com)
2. Virgin Credit Card (www.uk.virginmoney.com/)
3.Vanquis Card (www.vanquis.co.uk)
4. Barclaycard Platinum (www.barclaycard.co.uk)
5. MBNA Reward American Express (http://www.find.co.uk/creditcards/standard_credit_cards/mbna_platinum_plus)
6. MBNA Platinum Plus Credit Card
7. Arsenal FC Card (http://www.find.co.uk/creditcards/affinity_credit_cards/arsenal_fc_credit_card)
8. Nectar Credit Card (www.americanexpress.com)
9. RBS Credit Card (www.rbs.com)
10. HSBC Credit Card (www.hsbc.co.uk)

European Union

2008-06-06T02:10:00.000-07:00

I INTRODUCTION

Map of the European Union
The European Union (EU) was formed in 1993 by the 12 nations of the European Community. By 2004, the EU had grown in size to 25 countries. The EU allows European citizens greater freedom to work, live, study, and travel in member states.
© Microsoft Corporation. All Rights Reserved.
European Union (EU), organization of European countries dedicated to increasing economic integration and strengthening cooperation among its members. The European Union headquarters is located in Brussels, Belgium. As of early 2006 there were 25 countries in the EU.
The European Union was formally established on November 1, 1993. It is the most recent in a series of cooperative organizations in Europe that originated with the European Coal and Steel Community (ECSC) of 1951, which became the European Community (EC) in 1967. The original members of the EC were Belgium, France, West Germany (now part of the united Germany), Greece, Italy, Luxembourg, and Netherlands. Subsequently these nations were joined by Denmark, Ireland, the United Kingdom, Portugal, and Spain. In 1991 the governments of the 12 member states signed the Treaty on European Union (commonly called the Maastricht Treaty), which was then ratified by the national legislatures of all the member countries.
The Maastricht Treaty transformed the EC into the EU. In 1995 Austria, Finland, and Sweden joined the EU. In May 2004, 10 more countries were added, bringing the total number of EU member countries to 25. The 10 new members were Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.

Flag of the European Union
The flag of the European Union (EU) is composed of a circle of 12 gold stars on a royal blue background. The flag is meant to represent the union of all the peoples of Europe.
Marc Garanger/Corbis
The EU has a number of objectives. Its principal goal is to promote and expand cooperation among member states in economics and trade, social issues, foreign policy, security and defense, and judicial matters. Under the Maastricht Treaty, European citizenship was granted to citizens of each member state. Border controls were relaxed. Customs and immigration agreements were modified to allow European citizens greater freedom to live, work, and study in any of the member states.
Another major goal of the EU has been to implement Economic and Monetary Union (EMU), which introduced a single currency, the euro, for EU members. In January 2002 the euro replaced the national currencies of 12 EU member nations. Thirteen EU members do not currently participate in the single currency. They are Denmark, Sweden, the United Kingdom, and the 10 nations that joined the EU in 2004.
II HISTORY OF THE EUROPEAN UNION
The dream of a united Europe is almost as old as Europe itself. The early 9th-century empire of Charlemagne covered much of western Europe. In the early 1800s the French empire of Napoleon I encompassed most of the European continent. During World War II (1939-1945), German leader Adolf Hitler nearly succeeded in uniting Europe under Nazi domination (see National Socialism). All these efforts failed because they relied on forcibly subjugating other nations rather than fostering cooperation among them.
Attempts to create cooperative organizations fared little better until after World War II. Until then, nations strongly opposed all attempts to infringe on their powers and were unwilling to yield control over their policies. Early collaborative ventures were international or intergovernmental organizations that depended on the voluntary cooperation of their members; consequently, they had no direct powers of coercion to enforce their laws or regulations. Supranational organizations, on the other hand, require members to surrender at least a portion of their control over policy areas and can compel compliance with their mandates. After World War II, proposals for some kind of supranational organization in Europe became increasingly frequent.
A Early Cooperation
Postwar aspirations for a European supranational organization had both political and economic motives. The political motive was based on the conviction that only a supranational organization could eliminate the threat of war between European countries. Some supporters of European political unity, such as the French statesman Jean Monnet, further believed that if the nations of Europe were to resume a dominant role in world affairs, they had to speak with one voice and command resources comparable to those of the United States.
The economic motive rested on the belief that larger markets would promote competition and thus lead to greater productivity and higher standards of living. Economic and political viewpoints merged in the assumptions that economic strength was the basis of political and military power, and that a fully integrated European economy would reduce conflict among European nations. Because countries were hesitant to surrender any control over national affairs, most of the practical proposals for supranational organizations assumed that economic integration would precede political unification.
B Benelux Customs Union
The Benelux Customs Union (now the Benelux Economic Union) is an early example of a supranational economic organization. This union provided for a free-trade area composed of Belgium, Netherlands, and Luxembourg, and for a common tariff imposed on goods from outside the union. Formed in 1948, the union grew from the recognition that the economies of the separate states were individually too small to be competitive in the global market. Belgium and Luxembourg had, in fact, joined in an economic union as early as 1921, and the governments of Belgium and Netherlands had agreed in principle on a customs union during World War II. These three countries have been among the warmest advocates of European cooperation, and they have continued to work for closer economic integration of their own countries independently of broader European developments.
C European Coal and Steel Community (ECSC)
The first major step toward European integration took place in 1950. At that time French foreign minister Robert Schuman, advised by Jean Monnet, proposed the integration of the French and German coal and steel industries and invited other nations to participate. Schuman’s motives were as much political as economic. Many Europeans felt that German industry, which was reviving rapidly, needed to be monitored in some way. The ECSC provided an appropriate mechanism since coal and steel are central to many modern industries, especially the armaments industry.
The Schuman Plan, as it was called, created a supranational agency to oversee aspects of national coal and steel policy, such as levels of production and prices. Not coincidentally, this mandate allowed the agency to keep German industry under surveillance and control. Determined to allay fears of German militancy, West Germany immediately signed on and was soon joined by the Benelux nations and Italy. The United Kingdom, concerned about a potential loss of control over its industry, declined to join.
The treaty establishing the ECSC was signed in 1951 and took effect early the following year. It provided for the elimination of tariffs and quotas on trade in iron ore, coal, coke, and steel within the community; a common external tariff on imports relating to the coal and steel industries from other nations; and controls on production and sales. To supervise operations of the ECSC, the treaty established several supranational bodies: a high authority with executive powers, a council of ministers to safeguard the interests of the member states, a common assembly with advisory authority only, and a court of justice to settle disputes.
D European Economic Community (EEC)
In 1957 the participants in the ECSC signed two more treaties, known as the Treaties of Rome. These treaties created the European Atomic Energy Community (Euratom) for the development of peaceful uses of atomic energy and, most important, the European Economic Community (EEC, often referred to as the Common Market).
The EEC treaty provided for the gradual elimination of import duties and quotas on all trade between member nations and for the institution of a common external tariff. Member nations agreed to implement common policies regarding transportation, agriculture, and social insurance, and to permit the free movement of people and financial resources within the boundaries of the community. One of the most significant provisions of the treaty was that it could not be renounced by just one of the members and that, after a certain amount of time, further community decisions would be made by a majority vote of the member states rather than by unanimous action.
Both the EEC and the Euratom treaties created separate high commissions to oversee their operations. However, it was agreed that the ECSC, EEC, and Euratom would be served by a single council of ministers, representative assembly, and court of justice.
In the preliminaries to the 1957 treaties of Rome, other nations were invited to join the EEC. The United Kingdom objected to the loss of control over national policies implied in European integration and attempted to persuade European nations to create a free-trade area instead. After the EEC treaty was ratified, the United Kingdom, Norway, Sweden, Denmark, Switzerland, Austria, and Portugal created the European Free Trade Association (EFTA). The EFTA treaty provided only for the elimination of tariffs on industrial products among member nations. It did not extend to agricultural products, nor did it provide a common external tariff, and members could withdraw at any time. Thus the EFTA was a much weaker union than the Common Market.
In 1961, with the EEC’s apparent economic success, the United Kingdom changed its view and began negotiations toward EEC membership. In January 1963, however, French president Charles de Gaulle vetoed British membership, mainly because of the United Kingdom’s close ties to the United States. De Gaulle vetoed British membership a second time in 1967.
E European Community (EC)
In July 1967 the three organizations (the EEC, the ECSC, and Euratom) fully merged as the European Community (EC). The basic economic features of the EEC treaty were gradually implemented, and in 1968 all tariffs between member states were eliminated. No progress was made on enlargement of the EC or on any other new proposals, however, until after de Gaulle resigned as president of France in May 1969. The next French president, Georges Pompidou, was more open to new initiatives within the EC.
At Pompidou’s suggestion, a meeting of the leaders of the member states was held in The Hague, Netherlands, in December 1969. This meeting paved the way for the creation of a permanent financing system for the EC based on contributions from member states; the development of a framework for foreign policy cooperation among member nations; and the opening of membership negotiations with the United Kingdom, Ireland, Denmark, and Norway.
F Expansion of the EC
In 1972, after nearly two years of negotiations, it was agreed that the four applicant countries would be admitted on January 1, 1973. The United Kingdom, Ireland, and Denmark joined as scheduled; however, in a national referendum, the people of Norway voted against membership.
In the United Kingdom, however, popular opposition to EC membership remained. Many Britons felt British contributions to the EC budget were too high. After the Labour Party regained power in the United Kingdom in 1974, it carried out its election promise to renegotiate British membership conditions in the EC, particularly the financial ones. The renegotiation resulted in only marginal changes. However, questions about the United Kingdom’s commitment to the EC added to existing uncertainties within the community caused by the economic problems of the 1970s. The Labour government endorsed continued EC membership and called a national referendum on the issue for June 1975. Despite strong opposition from some groups, the British people voted for continued membership.
G Single European Act (SEA)
By the 1980s, 30 years after its inception, the EC still had not realized the hopes of the most ardent supporters of European unity: a United States of Europe. In fact, despite the removal of internal tariffs, it had not even succeeded in ending all restrictions on trade within the EC, nor in eliminating internal customs frontiers. The admission of less-developed Mediterranean countries—Greece in 1981, then Spain and Portugal in 1986—introduced a host of new problems, most related to their lower levels of economic development. In particular, the greater reliance of these countries on agriculture meant that a large percentage of funds the EU earmarked to support agriculture within the community would have to be redirected to the new members. This caused alarm within some quarters of the EU, particularly in Ireland, which feared that its own share of these funds would be reduced.
In 1985 the European Council, composed of the heads of state of the EC members, decided to take the next step toward greater integration. In February 1986 they signed the Single European Act (SEA), a package of amendments and additions to the existing EC treaties. The SEA required the EC to adopt more than 300 measures to remove physical, technical, and fiscal barriers in order to establish a single market, in which the economies of the member states would be completely integrated. In addition, member states agreed to adopt common policies and standards on matters ranging from taxes and employment to health and the environment. Each member state also resolved to bring its economic and monetary policies in line with those of its neighbors. The SEA entered force in July 1987.
H Creation of the European Union
In the late 1980s, sweeping political changes led the EC once again to increase cooperation and integration. As Communism crumbled in Eastern Europe, many formerly Communist countries looked to the EC for political and economic assistance. The EC agreed to give aid to many of these countries, but decided not to allow them to join the EC immediately. An exception was made for East Germany, which was automatically incorporated into the EC after German reunification.
In the wake of the rapid political upheaval, West Germany and France proposed an intergovernmental conference (IGC) to pursue closer European unity. An IGC is a meeting between members that begins the formal process of changing or amending EC treaties. Another IGC had occurred earlier, in 1989, to prepare a timetable and structure for monetary union, in which members of the community would adopt a single currency. British prime minister Margaret Thatcher opposed calls for increased European unity, but in 1990 John Major became prime minister and adopted a more conciliatory approach. The IGCs began work on a series of agreements that would become the Treaty on European Union.
I Treaty on European Union

Maastricht Referendum
French citizens wait to cast their votes in a referendum on the 1993 Maastricht Treaty. The treaty changed the European Community (EC) into the European Union (EU). It had to be approved by a popular majority in each EC member country before it could go into effect.
Owen Franken/Corbis
The Treaty on European Union (often called the Maastricht Treaty) founded the EU and was intended to expand political, economic, and social integration among the member states. After lengthy negotiations, it was accepted by the European Council at Maastricht, Netherlands, in December 1991. Of particular significance, the treaty committed the EU to Economic and Monetary Union (EMU). Under EMU the member nations would unify their economies and adopt a single currency by 1999. The Maastricht Treaty also set strict criteria that member states had to meet before they could join EMU. In addition, the treaty created new structures designed to promote a more integrated foreign and security policy and to encourage greater cooperation on judicial and police matters. The member states granted the EU governing bodies more authority in several policy areas, including the environment, education, health, and consumer protection.
The new treaty aroused a good deal of popular opposition among EU member states. Much of the concern centered on EMU, which would replace national currencies with a single European currency. The United Kingdom refused to endorse some aspects of the treaty and gained exemptions from them, called opt-outs. These included not joining EMU and not participating in the Social Chapter, a section of the Maastricht Treaty outlining goals in social and employment policy, including a common code of worker rights. Danish voters rejected the treaty in a referendum, while French voters favored the treaty by only a slim majority. In Germany, a challenge to the treaty lodged with the country’s supreme court contended that membership in the EU violated the German constitution. In an emergency meeting of the European Council, Denmark gained substantial concessions and exemptions, including the right to opt out of EMU and any future common defense policy. Danish voters then approved the treaty in a subsequent referendum. Because of these difficulties, the EU was not formally inaugurated until November 1993.
J Amsterdam Treaty
Popular reactions against some elements of the Maastricht Treaty led to another intergovernmental conference among EU leaders that began in March 1996. This IGC produced the Amsterdam Treaty, which revised the Maastricht Treaty and other founding EU documents. The revisions were intended to make the EU more attractive and relevant to ordinary people.
The Amsterdam Treaty called on member nations to cooperate to create jobs throughout Europe, protect the environment, improve public health, and safeguard consumer rights. In addition, the treaty provided for the removal of barriers to travel and immigration among the EU member states except for the United Kingdom, Ireland, and Denmark, all of which retained their original border controls. The treaty included the potential for cooperation and integration with the Western European Union (WEU), an organization of Western European powers focused on defense. It also allowed the possibility of admitting countries from Eastern Europe to the EU. The Amsterdam Treaty was signed by EU members on October 2, 1997.
A document issued by the European Commission (the EU’s highest administrative body) in 1997, known as Agenda 2000, outlined a strategy for EU enlargement under the Amsterdam Treaty. The document called for wide-ranging reforms within the EU before any enlargement agreement could move forward. These included measures to increase economic growth, competitiveness, and employment; agricultural and structural reforms; and a new European financial framework.
K Treaty of Nice
The theme of EU expansion was addressed again in 2000 in what became the Treaty of Nice. Signed in 2001, this treaty outlined a series of staged reforms to prepare the EU for enlargement. The treaty called for a reduction in the potential size of the European Commission, reforms to voting rules and processes in the Council of the European Union, and a reallocation of seats in the European Parliament to member states.
Unlike the Single European Act or the Amsterdam Treaty, the Treaty of Nice did not seek to broaden the authority of the EU. Rather, the role and powers of an enlarged EU were addressed elsewhere—in the Laeken Declaration of 2001 and by the Convention on the Future of Europe, convened in March 2002. By late 2002, all EU members had ratified the Treaty of Nice. However, Irish voters nearly forced a renegotiation of the treaty after rejecting it in a referendum in 2001; many Irish worried that EU enlargement would reduce financial benefits received by Ireland. Nevertheless, Ireland’s ratification was secured in a second referendum held the following year, putting the schedule for EU enlargement back on course.
L Monetary Union

Euro Coins and Bills
On January 1, 1999, participating members of the European Union (EU) adopted a single currency, the euro. Euros were used mainly for accounting purposes and for electronic money transfers until January 1, 2002. At that time, euro-denominated coins and bills entered circulation and replaced the national currencies of participating EU member states.
Peter Weber/Tony Stone Images
The EU’s attempts to establish a single European currency, as set out in the Maastricht Treaty, were controversial from the start. Some EU countries, including the United Kingdom, worried that a shared European currency would threaten their national identity and governmental authority. Despite such concerns, many EU member countries struggled to meet the economic requirements for participating in Economic and Monetary Union (EMU) and adopting a shared currency, which was named the euro.
These requirements were stringent: (1) a country’s rate of inflation could not be more than 1.5 percent higher than an average of the rate in the three countries with the lowest inflation; (2) a country’s budget deficit could not exceed 3 percent of gross domestic product (GDP), and its national debt could not exceed 60 percent of GDP; (3) a country’s long-term interest rate could not be more than 2 percent higher than an average of the rate in the three countries with the lowest interest rates; (4) a country could not have devalued its currency against any other member nation’s for at least two years prior to monetary union.
EMU participants also agreed to abide by the Stability and Growth Pact, a budgetary agreement designed to underpin the euro after its planned launch in 1999. The pact required countries to keep their annual budget deficits below 3 percent of GDP or else risk fines, and it directed countries to take measures to eliminate their budget deficits altogether.
Most countries found it difficult to meet the EMU requirements. Measures to reduce inflation and high interest rates contributed to increasing unemployment, while efforts to control government deficits often led to higher taxes. These consequences compounded the problems of economic recession that most countries were already experiencing.
As the deadline for EMU approached, misgivings arose from many quarters that the economic climate was not right, that levels of economic performance across the countries were still too disparate, and that several countries had not strictly met the Maastricht criteria. Despite these concerns, the EU officially agreed in May 1998 to adopt the euro for 11 of the 15 member countries beginning on January 1, 1999. This agreement also created the European Central Bank (ECB) to oversee the new currency and to take charge of the monetary policies of the EU. The countries to adopt the euro were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.
The United Kingdom, Sweden, and Denmark met the EMU criteria but decided not to participate. Greece had hoped to be included in the first wave of countries to adopt the euro but failed to meet the criteria. On January 1, 1999, the 11 nations participating in the so-called euro zone began to use the euro for accounting purposes and electronic money transfers; their national currencies remained in circulation for other uses. Greece adopted the euro in January 2001, becoming the 12th member of the euro zone. In 2002 the ECB began issuing euro-denominated coins and banknotes, and the currencies of countries within the euro zone ceased to be legal tender.
The EU’s ten newest members, which joined the organization in 2004, are on various timetables for adopting the euro, and adoption efforts have met with strong opposition in a number of countries. Some new members, such as Cyprus, Estonia, Lithuania, and Slovenia, announced that they would take immediate steps to adopt the euro, opening them for membership in the single currency as early as 2007. In order to adopt the euro, a new member must first meet the EMU criteria. It must then demonstrate that its currency can remain stable relative to the euro over a two-year period.
After some initial troubles, the euro established itself as a viable currency in international money markets. Concern now shifted to the enforcement of a common monetary policy, under strict direction from the European Central Bank. Slowing growth and rising unemployment across the euro zone after 2000, however, led to higher budget deficits, and the European Commission soon had to warn Ireland and Germany to reduce their budgetary expenditures to conform to limits required by the Stability and Growth Pact. By 2002 there had emerged within the EU a broader concern about the continued feasibility of the Stability and Growth Pact. Many more countries seemed to be nearing, or in breach of, permissible budget deficits. At the same time, efforts to enforce the pact’s deficit ceiling were seen as inhibiting expenditures needed by national governments to promote social welfare and economic recovery.
M Growing Accountability

Jacques Santer
In 1995 Jacques Santer became president of the European Commission, the executive body of the European Union (EU). Santer served until 1999 when, along with the rest of the commission, he resigned in protest of a report issued by the European Parliament accusing some commission members of corruption and poor oversight.
Lehtikuva-Kainulainen/Woodfin Camp and Associates, Inc.
The introduction of Economic and Monetary Union led to unprecedented integration and cooperation among EU members. One consequence was a growing concern among European citizens and some EU member governments that the major EU institutions were not sufficiently democratic or accountable. Much of this concern centered on the European Commission. As the power of the EU grew, so did worries that the commission exercised too much control with too little oversight. At the same time, there were also concerns that the one democratically elected institution of the EU, the European Parliament, had little real power.
This issue came to a head in 1999, when a report prepared by independent auditors at the request of the European Parliament cited multiple examples of mismanagement on the part of the European Commission. The report accused several commissioners of corruption, cronyism, and poor oversight over programs under their control. After the report was released, the entire European Commission resigned, something that had never happened before. Experts generally considered the report and its consequences to be an important step by the European Parliament toward increasing the democratic accountability of the EU governing bodies.
III STRUCTURE OF THE EU
A Pillar System
The members of the EU cooperate in three distinct areas, often called pillars. At the heart of this system is the European Community (EC) pillar with its supranational functions and its governing institutions. The EC pillar is flanked by two pillars based on intergovernmental cooperation: Common Foreign and Security Policy (CFSP) and Justice and Home Affairs (JHA). These two pillars are a result of the Maastricht agreement to develop closer cooperation in these areas. However, because the members were unwilling to cede authority to new supranational institutions, policy decisions in these pillars are made by unanimous cooperation between members and cannot be enforced. For the most part, the governing institutions of the EC pillar have little or no input in the other two.
The CFSP and JHA pillars are based entirely on intergovernmental cooperation, and decisions must be made unanimously. CFSP is a forum for foreign policy discussions, common declarations, and common actions that work toward developing a security and defense policy. It has successfully developed positions on a range of issues and has established some common policy actions; however, the CFSP has failed to agree on a common security and defense. Some countries, led by France, want an integrated European military force, while others, especially the United Kingdom, insist that United States involvement through the North Atlantic Treaty Organization (NATO) is vital for European security.
This second argument was reinforced when the EU failed to resolve the crisis in Yugoslavia that began in 1991. Between 1991 and 1992 four of Yugoslavia’s six republics declared independence, resulting in a series of violent wars (see Yugoslav Succession, Wars of). EU attempts to find a settlement for these conflicts were ineffective because member states could not agree on how they should be involved, and they feared being dragged into military intervention. The Yugoslav crisis underlined the difficulties in achieving a common foreign policy for the EU. Effective international intervention in Yugoslavia ultimately came only with U.S. and NATO involvement, acting under the auspices of the United Nations.
As a result of lessons learned in Yugoslavia, clauses were included in the Amsterdam Treaty for improving cooperation on security and defense. Since the late 1990s the EU has developed the Common European Security and Defense Policy as an interim step toward the ultimate goal of a common defense policy. The EU has expressed its determination to take on a greater international role and more responsibility for humanitarian operations and peacekeeping activities. The EU also began to develop a rapid-reaction military force to enable it to respond to crises quickly with combat troops.
The EU has been more successful in JHA, which formalized and extended earlier intergovernmental cooperation in combating crime, especially drug trafficking, and in setting immigration and asylum policies. Under the Amsterdam Treaty, some aspects of JHA were moved to the supranational EC pillar. These related to asylum and visa issues, immigration policy, and external border controls. The JHA pillar is now primarily concerned with police cooperation and combating international crime.
Standing above the three pillars and in a position to coordinate activities across all of them is the European Council. The council is in strict legal terms not an EU institution. It is the meeting place of the leaders of the national governments. Its decisions are almost always unanimous but usually require intense bargaining. The council shapes the integration process and has been responsible for almost all EU developments, including the SEA and the Maastricht, Amsterdam, and Nice treaties. The European Council has provided the EU with initiatives for further development, agendas in various policy fields, and decisions that it expects the EU to accept. The council’s actions illustrate one of the major dilemmas within the EU: how to promote further unity and integration while permitting national governments to retain as much influence as possible over decisions.
B Major Bodies

Structure of the European Union
This illustration shows the major governing bodies of the European Union (EU) and how they are related to each other. The EU is built around three areas of cooperation among member states. These areas are often called pillars. Two of the pillars, Justice and Home Affairs (JHA) and Common Foreign and Security Policy (CFSP), are based primarily on voluntary cooperation among member governments. The third pillar is the European Community (EC), which includes the major governing bodies of the EU. The decisions of these bodies are binding over the member states.
© Microsoft Corporation. All Rights Reserved.
The European Community (EC) pillar contains all the governing institutions of the EU. The major ones are the European Commission, the Council of the European Union, the European Parliament, the European Court of Justice, and the Court of Auditors. In addition, there are many smaller bodies in the EC pillar, such as the Economic and Social Committee, and the Committee of the Regions.
B1 European Commission

European Commission Building, Brussels
Brussels, Belgium, is home to the headquarters of the European Union. The big white building in this photograph houses the European Commission. The commission is the highest administrative body in the European Union.
© Microsoft Corporation. All Rights Reserved.
The European Commission is the highest administrative body in the EU. Unlike the European Council, which oversees all three pillars of the EU, the commission concentrates almost solely on the EC pillar. It initiates, implements, and supervises policy. It is also responsible for the general financial management of the EU and for ensuring that member states adhere to EU decisions. The commission is meant to be the engine of European integration, and it spearheaded preparations for the single market and moves toward establishing the euro.
Commissioners are appointed by member governments and are supported by a large administrative staff. Initially, France, Germany, Italy, Spain, and the United Kingdom each appointed two commissioners, while other member countries appointed one each. The Treaty of Nice, signed in 2001, changed the structure of the commission so that by 2005 each member state could appoint only one commissioner.
However, when the EU reaches 27 member states, the European Council is obligated to determine how large the commission should be. The Treaty of Nice also altered the selection procedures for commissioners, giving the European Council and the European Parliament a role in the confirmation process.
B2 Council of the European Union
The Council of the European Union (formerly called the Council of Ministers) represents the national governments. It is the primary decision-making authority of the EU and is the most important and powerful EU body. Although its name is similar to that of the European Council, the Council of the European Union’s powers are essentially limited to the EC pillar, whereas the European Council oversees all three pillars of EU cooperation.
When the Council of the European Union meets, one government minister from each member state is present. However, the minister for each state is not the same for every meeting. Each member state sends its government minister who is most familiar with the topic at hand. For example, a council of defense ministers might discuss foreign policy, whereas a council of agriculture ministers would meet to discuss crop prices.
The Council of the European Union adopts proposals and issues instructions to the European Commission. The council is expected to accomplish two goals that are not always compatible: further EU integration on one hand and protection of the interests of the member states on the other. This contradiction could become more difficult to reconcile as the EU continues to expand.
Decision-making in the council is complex. A few minor questions can be decided by a simple majority. Many issues, however, require what is called qualified majority voting (QMV). In QMV each country has an indivisible bloc of votes that is roughly proportional to its population. It takes two-thirds of the total number of votes to make a qualified majority. QMV was introduced in some policy areas to replace the need for a unanimous vote. This has made the decision-making process faster and easier because it prevents any one state from exercising a veto. Since the Single European Act, QMV has been steadily extended to more areas. Many important decisions, however, still require unanimous support.
B3 European Parliament (EP)

The European Parliament
The European Parliament is the representative body of the European Union (EU). The parliament is composed of 626 members that are popularly elected from among the EU’s 15 member states. The headquarters of the European Parliament are in Strasbourg, France.
Francis Apesteguy/Liaison Agency
The European Parliament (EP) is made up of 732 members who are directly elected by the citizens of the EU. Direct elections to the EP were implemented in 1979. Before that time, members were appointed by the legislatures of the member governments. The European Parliament was originally designed merely as an advisory body; however, its right to participate in some EU decisions was extended by the later treaties. It must be consulted about matters relating to the EU budget, which it can reject; it can remove the European Commission as a body through a vote of no confidence; and it can veto the accession of potential member states.
The European Parliament’s influence is essentially negative: It can block but rarely initiate legislation, its consultative opinions can be ignored, and it has no power over the Council of the European Union. Its effectiveness is limited by two structural problems: It conducts its business in 20 official languages, with consequent huge translation costs, and it is nomadic, using three sites in different countries for its meetings. Unless changes are made, these weaknesses will likely intensify as the union grows larger.
At the same time, there have been frequent calls for expanding the powers of the European Parliament, which would increase the democratic accountability of the EU. The weaknesses of the European Parliament can be remedied, however, only by the national governments. To cope with an increase in the number of member states due to EU enlargement, the Treaty of Nice allowed for a limit to the size of the EP by providing for a reallocation of seats among the members.
B4 European Court of Justice (ECJ)
The European Court of Justice (ECJ) is the judicial arm of the EU. Each member country appoints one judge to the court. The ECJ is responsible for the law that the EU establishes for itself and its member states. It also ensures that other EU institutions and the member states conform with the provisions of EU treaties and legislation. The court has no direct links with national courts and no control over how they apply and interpret national law, but it has established that EU law supersedes national law.
The ECJ’s assertion that EU law takes precedence over national law, and the fact that there is no appeal against it, have given the ECJ a powerful role in the EU. This role has, on occasion, drawn criticism from both national governments and national courts. The ECJ has declared both for and against EU institutions and member states.
The ECJ’s historically high caseload was eased in 1989 when the Court of First Instance was created. This court hears certain categories of cases, including those brought by EU officials and cases seeking damages. Rulings by the Court of First Instance may be appealed to the ECJ, but only on points of law. Despite the establishment of this court, the ECJ’s caseload has continued to rise. As a result, the Treaty of Nice introduced further reforms to reduce the accumulated backlog of cases.
B5 Court of Auditors
The Court of Auditors is made up of 25 members, one from each EU member state. The court oversees the finances of the EU and ensures that all financial transactions are carried out according to the EU budget and laws. The court issues a yearly report to the Council of the European Union and the European Parliament detailing its findings.
B6 European Central Bank (ECB)
The European Central Bank (ECB) began operations in 1998. It is overseen by an executive board that is chosen by agreement of EU member governments and includes the ECB president and vice president. The ECB has exclusive authority for EU monetary policy, including such things as setting interest rates and regulating the money supply. In addition, the ECB played and continues to play a major role in overseeing the inauguration and consolidation of the euro as the single EU currency. Its authority over monetary policy and its independence from other EU institutions make the ECB a powerful body. There are misgivings in some quarters that the ECB is too independent, leading to a debate over whether it should be subject to political direction.
B7 Other Bodies
Other important bodies in the EU include the Economic and Social Committee and the Committee of the Regions. The Economic and Social Committee is a 317-member advisory body drawn from national interest groups of employers, trade unions, and other occupational groups. It must be consulted by the European Commission and the Council of the European Union on issues dealing with economic and social welfare. The Committee of the Regions was formed in 1994 as a forum for representatives of regional and local governments. It was intended to strengthen the democratic credentials of the EU, but it has only a consultative and advisory role.
IV IMPORTANT FEATURES AND POLICIES OF THE EU
A major goal of the EU has been to establish a single market in which the economies of all the EU member states are unified. The EU has sought to meet this objective in three ways: by defining a common commercial policy, by reducing economic differences among its richer and poorer members, and by stabilizing the currencies of its members.
The 1957 Rome treaties obliged the EU to adopt a Common Commercial Policy (CCP) and a Common Agricultural Policy (CAP). By 1968 the EU had also created a customs union in which all tariffs and duties among members were eliminated. Finally, members had defined uniform commercial practices for trade with nonmember states. In the 1980s the Common Fisheries Policy (CFP) was adopted to regulate fishing in EU waters.
The EU has attempted to address regional economic differences through agencies such as the European Social Fund, the European Regional Development Fund, the Cohesion Fund, and the European Investment Bank (EIB). These agencies provide money through loans or grants to promote development in the economically disadvantaged areas of the EU. However, apart from activities of the EIB, this funding is limited by the size of the EU’s overall budget, which is equivalent to about 1 percent of the gross domestic product (GDP) of all the member states.
Finally, the EU attempted to stabilize the currencies of its members with the European Monetary System (EMS). The EMS was prompted not only by the desire for a single market, but also by international economic problems and fluctuations in exchange rates. These problems also convinced the EU of the importance of Economic and Monetary Union (EMU), in which both the economies and the currencies of the members would be unified.
A Common Policies
A1 Common Agricultural Policy (CAP)

Protesting the CAP
French farmers ride their tractors from the headquarters of the European Parliament in Strasbourg, France, to Paris to protest proposed changes to the Common Agricultural Policy (CAP) of the European Union (EU). The CAP supports agriculture in EU member countries. Some EU members complain that the CAP is too expensive, but the countries that receive the largest percentage of CAP funds are reluctant to agree to reform.
AFP/Corbis
The Common Agricultural Policy (CAP) was established by the 1957 Rome treaty that created the European Economic Community. The policy reflected a belief in the economic value of agriculture. Memories of the economic hardships that followed the two world wars led the EEC founders to believe that member states should be able to feed their populations from their own resources.
The CAP was intended to stabilize agricultural markets, improve productivity, and ensure a fair deal for both farmers and consumers. It has three major elements: a single market for agricultural products with a system of common prices to producers across the EU; preference for EU producers through a common levy on all agricultural imports from abroad; and shared financial responsibility for guaranteeing prices.
From the beginning, the common prices set were based on political pressure from farmers and governments rather than market considerations. This led to massive overproduction. Prices remained artificially high, and all surpluses were bought by the EU and either stored, destroyed, or sold at very low prices on international markets. The costs became a huge burden. Even so, there were few internal critics, although the CAP consumed two-thirds of the EU budget in the early 1980s. The CAP was, however, unpopular overseas. Developing countries believed it hurt their own export agriculture, while the United States and other major food producers attacked the CAP’s protectionism, distortion of prices, and dumping of surplus produce on world markets.
Despite complaints, EU member states with strong farming interests were initially unwilling to accept the need for reform. The CAP was almost the only major common policy possessed by the EU, and consequently it was an important symbol of integration. Nonetheless, the EU did agree to reforms to the CAP in 1984 and 1988. These agreements, which imposed production quotas on some types of agriculture and reduced agricultural spending, were driven by a combination of external pressure and estimates that CAP costs would soon outstrip EU resources. A more radical revision was finalized in 1992. This revision switched EU spending from supporting artificially high agricultural prices to directly subsidizing farmers’ incomes. This involved cutting guaranteed prices to farmers, and the effect was a significant reduction in CAP costs and in the level of support given to farmers. By 2001 CAP expenditure had been reduced to 46 percent of the EU budget.
Still, the CAP remained the largest item in the EU budget and continued to provoke resentment among many EU citizens and other world producers. The commitment to the CAP as a symbol of integration may not guarantee its future, however, especially given the EU’s decision to accept members from Eastern Europe. The economies of these countries are more agricultural and less efficient than EU states. Without major reform, almost all CAP expenditure would be redirected to these states, which would be politically and economically impossible.
The European Commission attempted to address the future of CAP funding in Agenda 2000, a document detailing a strategy for enlargement. A wide-ranging reform program proposed by the commission sought to reduce payments to larger farms and to scale back market supports and export subsidies. But strong differences of opinion remained between the member states.
In 2002 the commission’s reform plans were largely abandoned, and a group of member states led by France effectively deferred a more radical overhaul. Instead, limits were placed on how much assistance new EU members could expect from the CAP, suggesting that for the foreseeable future there would be a two-tier pattern of funding favoring the older member states. Further limits were imposed in CAP reforms adopted in 2003 and 2004.
A2 Common Fisheries Policy (CFP)
The other major common policy is the Common Fisheries Policy (CFP) of 1982. It imposed controls on access to fish stocks and attempted to preserve the fisheries. The CFP set up a structure of price and compensation systems modeled on the CAP. The policy successfully limited overfishing in EU waters. However, national fishing industries have objected to its system of fixing prices and allocating to each country strict quotas on the amount of each fish species that can be caught. Controversy over the CFP has been persistent, with frequent disputes between the EU and national fishing industries and among member states.
B Reducing Economic Differences
Under the 1957 Rome treaty that created the EEC, the signatories pledged to standardize policies regarding working conditions, social insurance, and similar matters. However, little progress was made until an increase in oil prices brought about the worldwide economic depression of the 1970s. At that time, the European Regional Development Fund was created and the moribund European Social Fund, which had originally been established by the Rome treaty, was reactivated. In 1994 the EU established the more comprehensive Cohesion Fund for reducing the economic gap between its richest and poorest areas.
B1 European Regional Development Fund and European Social Fund
The European Regional Development Fund is concerned with infrastructure developments proposed by member governments. Since 1989 it has focused on regions with weak economies, severe industrial decline, or problems of rural development. Each member country is eligible to receive a percentage of the fund’s budget, determined roughly by its population size and economic wealth. The fund normally covers only 50 percent of the proposed costs; the remainder has to come from national sources. The European Social Fund is organized in much the same way, but it focuses mainly on the training and retraining of workers. Since 1988 it has concentrated more on long-term and youth unemployment, especially in the economically disadvantaged regions of the EU. All countries have benefited from the funds, but the vast bulk of grants have gone to poorer areas.
B2 Cohesion Fund
Another instrument for reducing economic differences between EU member states is the Cohesion Fund. The fund was established to transfer money to the poorer EU states to assist them in meeting the criteria for Economic and Monetary Union. As with the Regional Development Fund and the Social Fund, the majority of grants from the Cohesion Fund have gone to the poorer member states.
B3 European Investment Bank (EIB)
The European Investment Bank (EIB) was established in 1957 under the Rome treaty that created the EEC. Its primary objective is to fund projects that promote European integration. It focuses mainly on industry, energy, and infrastructure. The member states contribute to its finances, but it raises most of its funds on international markets. Some 8 percent of its budget goes to projects outside the EU. The bank only offers loans, not grants, and its contribution must be matched by an equivalent outlay from other sources. The EIB is an autonomous body able to make its own decisions free of political direction, within the general legal framework of the EU. It has been one of the most successful EU bodies. Since 1993 its annual lending volume has exceeded that of the International Bank for Reconstruction and Development (the World Bank).
C Stabilizing Currencies: The European Monetary System (EMS)
The European Monetary System (EMS) is the exchange rate structure of the EU. It was established in 1979 to stabilize exchange rates among members at a time when currencies were fluctuating dramatically because of the economic recession of the 1970s. The promotion of stable currencies, it was hoped, would provide the foundations for a future monetary union and a single currency among member states.
The core of the EMS and the engine of stabilization is the Exchange Rate Mechanism (ERM). This system was designed to reduce the amount that the currencies of member states could fluctuate against each other. By evening out exchange rate fluctuations and stabilizing currencies, the ERM was intended to stimulate trade and investment among EU members, and to help prevent inflation by linking weaker national currencies to the strong and stable German national currency, the deutsche mark.
In addition to the ERM, the EMS introduced the European Currency Unit (ECU), which was used for accounting and for administrative purposes. The ECU was replaced by the euro when EMU went into effect on January 1, 1999.
The EMS was highly successful in the 1980s. It helped promote a sense of collective responsibility and discipline that contributed to a reduction of inflation and, after 1987, to a period of exchange rate stability. Its success led to the further push in the Maastricht Treaty toward full economic and monetary integration. However, once currency realignments under the ERM had been largely completed, the EMS became more rigid, and currencies were allowed to fluctuate against each other only by very small amounts. This rigidity prevented countries experiencing economic difficulties from simply adjusting their exchange rates as they might have done otherwise.
Exchange rate rigidity, coupled with differing economic and monetary conditions in the member states, made it difficult for the EMS to hold stronger and weaker currencies together when currency traders began to have doubts about the value of certain members’ currencies. Feeding such doubts were Germany’s reunification in 1990, which generated huge costs, followed by difficulties in ratifying the Maastricht Treaty. Waves of currency speculation in 1992 and 1993 forced several countries to devalue their currencies, and the United Kingdom and Italy had to leave the ERM. The EMS survived by increasing the amount that currencies could fluctuate against one another, but the increase was so great that members’ currencies could fluctuate almost at will. The EMS was held together only by the EU’s political will to create monetary union and a single currency.
The role of the EMS has remained essentially unchanged with the introduction of the euro. It regulates exchange rates between the euro and those EU states that did not join the single currency.
D Economic and Monetary Union (EMU)
Economic and Monetary Union (EMU) is a step beyond a single market toward further integration. EMU requires an intense degree of economic coordination among its members. Participating nations must integrate their budgetary policies, establish common interest rates, and use a single currency. It is a logical step forward from the European Community’s customs union of 1968 and the decision in the 1987 Single European Act to move to a single market.
EMU first appeared on the EC agenda in the late 1960s, following the community’s economic success. At that time, concerns were growing that the post-World War II fixed exchange rate system was beginning to crumble. This system linked the major world currencies to the U.S. dollar, which was tied to the price of gold. However, in the mid-1960s the dollar began to weaken, and confidence in the system waned. What the EC wanted was a fixed exchange rate system that was less susceptible to the influence of the dollar. In 1969 EC leaders asked Pierre Werner, the premier of Luxembourg, to head a committee to devise a new system for the EC. In 1970 they accepted Werner’s recommendation for a movement to full EMU by 1980.
Poor economic conditions in the 1970s, however, forced postponement of the Werner Plan. In 1971 the United States uncoupled the U.S. dollar from gold, and subsequently, currencies that had been tied to the dollar became floating currencies with no fixed exchange rates. Then in 1973 oil prices quadrupled, producing a tumultuous economic climate in which governments were faced with both rising inflation and rising unemployment. EMU was more or less forgotten as the EC instead concentrated on trying to achieve a more modest structure of currency stability. After some initial difficulties, the result was the successful European Monetary System of 1979.
The seemingly positive effects of the EMS and the 1987 decision to form a single market led to a resurrection of the Werner Plan, with EMU to be implemented in three stages after 1990. In Madrid in June 1989 the European Council set up an intergovernmental conference (IGC) to flesh out the proposal. The IGC report was incorporated into the Maastricht Treaty in 1991. It was accepted that the first stage of EMU, the elimination of exchange controls and restrictions on the flow of capital, had already begun. The second stage was set for 1994, when member states would begin to coordinate their economies to reduce inflation and budget deficits. Full EMU, with the inauguration of a single currency under the direction of an EU central bank, would begin in 1999 at the latest. After pressure from Germany, which wanted the single currency to be as strong as the deutsche mark, the EU decided that countries entering the third stage would have to meet strict economic criteria on the size of government deficit, interest rate levels, inflation, and currency stability.
However, the currency speculation problems in 1992 and 1993 that caused Italy and the United Kingdom to leave the ERM, along with a general slide into economic recession, raised doubts about how many countries would meet the EMU criteria. Many governments struggled to control inflation and budget deficits through cuts in government spending and other austerity measures, but their efforts often led to higher unemployment and popular discontent. By 1998 many people within the EU believed that the qualification criteria would have to be relaxed for EMU to occur. Despite these worries, only Greece failed to meet the criteria. On January 1, 1999, the single currency, the euro, went into use. Greece was permitted to adopt the euro two years later, on January 1, 2001, after the Greek government succeeded in lowering inflation and budget deficits.
The economic success of EMU depends on whether the euro is accepted in the international markets as a stable and strong currency and the extent to which it leads to a greater convergence of national economies and greater mobility of production, goods, and services within the EU. There is still debate over whether EMU has a sufficiently firm foundation for these goals to be achieved. However, many EMU supporters find disagreements about the economic costs and benefits less important than the conviction that EMU, even if economically flawed, is an important step toward political integration.
EMU therefore supports the views of Robert Schuman and Jean Monnet that political union is best achieved through economic union. It has also reinforced the central role of France and Germany in the EU. The reunification of Germany reawakened French concerns of German dominance in Europe and energized France’s desire to influence German economic policy. At the same time, Germany wanted to allay fears of an ascendant militaristic German nationalism. Much the same as in 1950, when the European Coal and Steel Community was created, both governments believed that these political issues could be resolved through economic integration. These concerns underpinned a more widespread belief that long-term economic and political benefits outweighed the initial costs of switching to a single currency.
V RELATIONS WITH THE REST OF THE WORLD
One of the major objectives of the European Union is to speak with one voice and to have a unified policy position on world issues. This has been easier to achieve in economics and trade than on political problems. Bilateral and multilateral trade agreements have been signed between the EU and most developing countries. Common political positions, however, have been hindered by conflicts between national interests, despite close collaboration among EU member states and the development of common foreign policy statements.
Such collaboration has not always resulted in common action. EU countries were divided over the 1991 Persian Gulf War, the post-1991 crises in the former Yugoslavia, and future relations with Russia and Eastern Europe. In each instance, differences arose between members over how and to what extent the EU should become involved in foreign policy problems, and what the results of any EU action would be for members’ economies and political relationships.
A EU Expansion
By 1995 all the former Communist countries of Eastern Europe had applied for EU membership. The countries of Eastern Europe had less-developed economies than those of Western Europe, raising questions about their ability to cope with the competitive pressures of the EU’s internal market. In addition, the EU was concerned about the stability of democratic institutions in these countries and their commitment to human rights and the protection of minorities. Expansion would require a significant reevaluation of EU programs—especially the CAP—and distribution of EU resources. The richer member states worried that they would have to pay more into EU funds, while poorer member states feared that their share of EU funding for agriculture and regional development would be drastically reduced. Equally, it was argued that enlargement without significant institutional reform would reduce the effectiveness of the EU.
Despite these worries, trade between Eastern and Western Europe substantially increased after 1990. Western nations began to make commercial investments in Eastern Europe; at the same time, the EU provided economic aid, formed joint ventures, and signed formal agreements of political and cultural cooperation. In 1997 the EU agreed to open membership talks with Cyprus, the Czech Republic, Estonia, Hungary, Poland, and Slovenia, with EU membership coming sometime after 2000. Then, in 2000, the EU opened accession negotiations with Bulgaria, Latvia, Lithuania, Malta, Romania, and Slovakia. (At the same time the EU declined to pursue in detail the long-standing application of membership from Turkey, noting concerns about the country’s human rights record.) In May 2004 the EU formally admitted ten of these European nations—all except Bulgaria and Romania—as member states. Bulgaria and Romania are expected to become EU member states in 2007.
B The EU and Non-European Nations
Relations between the EU and the non-European industrialized countries, especially the United States and Japan, have been both rewarding and frustrating. The EU follows a protectionist policy, especially with respect to agriculture, which on occasion has led the United States in particular to adopt retaliatory measures. In general, however, relations have been positive. The United States and Japan are the largest markets outside Europe for EU products and are also the largest non-European suppliers.
The EU has been less protectionist when dealing with developing countries, which receive more than one-third of its exports. By the mid-1990s all underdeveloped countries could export industrial products to EU nations duty free; many agricultural products that competed directly with those of the EU could also enter duty free. In addition, the EU has reached special agreements with many countries in Africa, the Caribbean, and the Pacific (the so-called ACP countries). In 1963 it signed a convention in Yaoundé, Cameroon, offering commercial, technical, and financial cooperation to 18 African countries, mostly former French and Belgian colonies. In 1975 it signed a convention in Lomé, Togo, with 46 ACP countries, granting them free access to the EU for virtually all of their products, as well as providing industrial and financial aid. The Lomé convention was renewed and extended to a total of 58 countries in 1979; to 65 in 1984; and to 69 in 1989. In 2000 the Lomé convention was superseded by the Cotonou Agreement, which provides a more wide-ranging and longer-term basis for the EU’s relationship with ACP countries. The EU has concluded similar agreements with all the Mediterranean states except Libya, as well as other countries in Latin America and Asia.
VI THE FUTURE OF THE EUROPEAN UNION
The EU has come a long way since 1951. Its membership has grown to include most of Western Europe and it is poised to absorb much of Eastern Europe as well. It has developed a common body of law, common policies and practices, and a great deal of cooperation among its members. Its progress, however, has been uneven, with spurts of activity separated by dormant periods. After vigorous activity in the 1960s, it was not until the mid-1980s that the EU moved decisively to greater integration. In the 1990s concerns about the economic climate and evidence of popular disenchantment with the EU led to a slowdown in innovation. Both the Amsterdam and Nice treaties emphasized consolidation rather than addressing outstanding issues.
This erratic progress is in part due to two unresolved conflicts within the EU. The first is whether to give priority to “deepening” or “widening,” that is, whether to concentrate upon integrating the existing members further, or to welcome new members so that all can have an input into the kind of Europe they want. The second is the conflict between supranationalism and intergovernmentalism. Despite broad acceptance of the supranational principle, national governments have been reluctant to cede control over all policy areas to EU institutions. The development of three distinct EU pillars reflects this reality: Member states have declined to yield national control to supranational institutions over politically sensitive areas such as foreign policy and judicial affairs.
One of the most immediate challenges facing the EU is to secure the long-term success of the euro, an outcome that rests in part upon how acceptable it proves to world financial institutions and markets. Enlarging the EU by including Eastern Europe should, over time, improve economic prospects by extending the single market and stimulating economic growth and trade. The EU hopes that enlargement will raise the EU’s standing as the major European voice in world affairs and contribute to security and stability throughout Europe.
It has proven difficult, however, for the EU and its member states to forge a united position on the future of EU finances and structures after enlargement. Under existing criteria, the bulk of funds dispersed under the CAP to support agriculture—by far the largest element of EU spending—will have to be transferred to the new member states. This has alarmed poorer member states accustomed to receiving these funds, while richer members are reluctant to provide more CAP funding.
The budget issue and enlargement also present problems for the structure of the EU. They raise questions about the nature of the European Commission, how nations should be represented on the commission, and the extent of the commission’s authority and responsibility. As the power of the EU has grown, the organization has drawn criticism for being undemocratic, since the European Parliament has no real powers or control over decisions. Furthermore, the decision-making bodies, especially the commission, are not subject to any democratic check.
Uncertainties about the future of the EU are underlined by concerns among member states over the potential loss of their ability to act independently. A reluctance to cede national authority has been most pronounced in security policy. The EU failed to present a coherent front in either the Persian Gulf War or the former Yugoslavia when required to move from a common policy position to a common action. The desire of some countries to build a common defense policy is resisted by others that insist that at best a European defense force can only be supportive of and subordinated to NATO.
The EU’s decision to welcome 10 new member states in 2004 raised many questions about integration. In June 2004 the EU member states agreed to the final text of the first EU constitution, which was primarily developed to streamline EU institutions and facilitate enlargement. The final text was the result of more than two years of draft negotiations. Built on the founding treaties of the EU, the constitution further defined the roles and powers of EU institutions, such as the European Parliament. Ratification of the constitution required approval by all 25 member states (including the 10 new members), either by popular referendum or by parliamentary vote, by November 2006.
In May 2005, however, voters in France and Netherlands resoundingly rejected the proposed EU constitution, plunging the EU into its worst political crisis in decades. Soon thereafter several EU member states announced they would postpone their own votes on the constitution. At the EU summit meeting in June, EU leaders abandoned their plan to ratify the constitution by the November 2006 target date. EU president Jean-Claude Juncker described the proposed constitution as “no longer tenable” and called for a “period of reflection.” The summit also exposed deep rifts in the EU over economic integration. Budget talks broke down after leaders failed to resolve a bitter dispute that primarily involved Britain and France. Britain’s insistence on a reform of the CAP, which sets farm subsidies, was strongly opposed by France.
All this raises further questions about what the EU is and what it wants to achieve. For almost all its life span, European integration has resulted from elite initiatives and agreements that did not involve national electorates. In the 1990s, however, the picture changed because of the single market, demands for more harmonization, and the Maastricht Treaty. Popular discontent with elite decisions increased, indicating that electorates could no longer be taken for granted. Almost all EU activity has focused on building the equivalent of a state encompassing much of Europe. Yet little effort has focused on how to create a European nation with a strong bond of identity across national borders, making European citizens feel they have much, including a future, in common. The effort to forge a European identity will be a major challenge of the 21st century.
Despite these challenges, the EU is unlikely to disappear. It has become a fact of life, with the countries enmeshed together in a host of cooperative practices. The EU has had great success in developing a culture of collaboration, and it occupies a place at the center of Europe. What is at issue is not its survival, but its form as it leads Europe in the 21st century.

Contributed By:
Derek W. Urwin
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

European Monetary System (EMS)

2008-06-06T02:04:00.000-07:00

European Monetary System (EMS), system designed to increase financial cooperation and monetary stability within the European Union (EU). The EMS was created in 1979 in response to the fluctuation of European exchange rates that occurred in the wake of dramatic increases in oil prices in 1974. The primary purposes of the EMS were to stabilize exchange rates in the EU and to aid the long-term process of European monetary integration.
The central component of the EMS was the Exchange Rate Mechanism (ERM), a voluntary system of fixed exchange rates. This system was based on the European Currency Unit (ECU, which became the euro in 1999), the unit of account of that the EU adopted at the creation of the EMS. Under the ERM, the currencies of participating countries were allowed to fluctuate in relation to one another and to the ECU, but only by small amounts. This amount was set at 2.25 percent for all countries except Italy, Spain, and the United Kingdom, which had 6 percent margins of fluctuation.
The ERM was an important part of the plan to achieve Economic and Monetary Union (EMU). Under EMU, the economies of the EU states would be united and the EU would have a single currency administered by an EU central bank. EMU was the ultimate aim of the EMS and was a central part of the 1992 Maastricht Treaty that founded the EU.
The ERM was not without problems. First of all, not all EU members belonged to the ERM, and this limited its effectiveness. Greece never joined, and the United Kingdom did not join until 1990. In addition, by the early 1990s the system had become too rigid, and currencies were unable to fluctuate in relation to each other even in times of crisis. This came to a head in 1992 when currency traders began to have doubts about the value of some EU members’ currencies, leading to speculative attacks. The large-scale buying and selling of these currencies weakened the ERM severely, and the difficulty in maintaining the fixed exchange rates led the United Kingdom and Italy to withdraw from the ERM.
To prevent more countries from being forced out, in 1993 the ERM margin of fluctuation was widened for all currencies except the Dutch guilder and the German currency, the deutsche mark. This action left only The Netherlands and Germany within the 2.25 percent band. Since being within this band was one of the original conditions for participation in economic and monetary union and for adopting the single currency, many EU states were concerned that widening the fluctuation margins would seriously jeopardize the EMU. By April 1994 Belgium, Denmark, France, Ireland, and Luxembourg were back within the 2.25 percent band, but Spain and Portugal remained under pressure; in March 1995 they were forced to depreciate their currencies against the ECU. At the same time, the United Kingdom and Denmark, concerned about the potential problems of EMU, negotiated the right to opt out of monetary union.
On January 1, 1999, EMU went into effect. The euro replaced the ECU as a common currency on a one-to-one basis, but for only 11 states: Greece had failed to qualify, while the United Kingdom, Denmark, and Sweden declined to join. (Greece later met the economic criteria and adopted the euro on January 1, 2001.) The EMS was effectively transformed into economic and monetary union, with a single currency controlled by a European central bank. However, the ERM was revised as a mechanism for regulating relations between the euro and the currencies of those EU countries not participating in EMU.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

EURO

2008-06-06T01:56:00.000-07:00

Euro, monetary unit of the European Union (EU). On January 1, 2002, euro-denominated coins and bills went into circulation in 12 of the 15 EU member states—Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain. The euro replaced the currencies of these nations. Four small non-EU countries also have adopted the euro as their national currency—Vatican City, Andorra, Monaco, and San Marino.
The adoption of the euro was the final step in the EU’s plan for Economic and Monetary Union (EMU). EMU was designed to establish a single currency and a single monetary authority for EU member states, and was an integral part of the 1991 Maastricht Treaty that founded the EU. In order to make the euro a stable currency, the EU set stringent economic criteria that member countries had to meet before they could adopt the euro. These criteria dealt with things such as levels of inflation, amount of budget deficit and government debt, and stability of the existing national currency.
On January 1, 1999, the euro went into use for accounting purposes and electronic fund transfers in 11 participating EU member states. Greece, the 12th participating member, did not officially adopt the euro until January 1, 2001. Between 1999 and 2002, the euro coexisted with the currencies of the participating states. Starting in 2002 euro notes and coins became legal tender and entered circulation in the 12 states. The member states’ old currencies were to remain legal tender until the end of February 2002, when all monetary transactions were to be conducted in euros. In 2004 one U.S. dollar was worth an average of 0.81 euros.
The bank of issue for the euro is the European Central Bank (ECB), which was established in June 1998 and began operation on January 1, 1999. The ECB, located in Frankfurt, Germany, has total control over all EU monetary policies, including setting interest rates and regulating the money supply.
The euro is divided into 100 cents. Euro notes are issued in denominations of 5, 10, 20, 50, 100, 200, and 500 euros. Coins are issued in denominations of 1, 2, 5, 10, 20, and 50 cents, and 1 and 2 euros. Although bills are identical in all countries, each country issues its own coins, which have a common design on one side and a national design or emblem from the country of issue on the other.
Taken from Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

Ebay in Indonesia

2008-05-06T21:09:00.000-07:00

Rabu, 30-01-2008 14:36:26 oleh: Mira Tj
Kanal: Suara Konsumen

Yesterday an e-mail drifted to mailbox from Paypal.
Judulnya:"Launching Local Bank Withdraw.
His contents explained that the owner of the Paypal account could have from Indonesia pulled money from his Paypal account and direct free was transferred to the account bank in Indonesia.
HORE!!!
Uptil now Paypal only provided fitur pulled money but was transferred to credit card for the owner of the account from Indonesia.
But by Paypal this dikenai fee IDR 50 thousand.
Now if being attracted by us money from the ATM used credit card, be hit by again fee IDR 50 thousand.
So this of HORE!!!
Today I wonder, why Paypal now gave fitur this to the owner of the account from Indonesia, the country that notabene in the year 90 was the country in an online manner-fraud highest in the world.
Then was tried by me gooling qword: ebay Indonesia.
There it Is: http://id.ebay.com/
This site was different from the site www.ebayindonesia.com that approximately last year still could be accessed.
A moment ago was tried by me visited, evidently already for smoked his site.
His front face language still in English, but if you clicked one of the merchandise things there, his contents must be in Indonesian.
Afterwards was wrong to see the HELP part, still me-refer to help Page ebay.com.
Fee that was put into effect also still in US$ (had a headache... had a headache... had a headache).
That was clear, was happy also Indonesia had finally been acknowledged by WWW.

wORLD bANK

2008-05-06T20:56:00.000-07:00

The World Bank is a vital source of financial and technical assistance to developing countries around the world. We are not a bank in the common sense. We are made up of two unique development institutions owned by 185 member countries—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

Each institution plays a different but supportive role in our mission of global poverty reduction and the improvement of living standards. The IBRD focuses on middle income and creditworthy poor countries, while IDA focuses on the poorest countries in the world. Together we provide low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes.

2008-05-06T20:51:00.000-07:00

A banker or bank is a financial institution that acts as a payment agent for customers, and borrows and lends money. In some countries such as Germany and Japan banks are the primary owners of industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies.

The first modern bank was founded in Italy in Genoa in 1406, its name was Banco di San Giorgio (Bank of St. George).

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current account, accepting term deposits and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current account, by making instalment loans, and by investing in marketable debt securities and other forms of lending.

Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account.

Banks borrow most funds borrowed from households and non-financial businesses, and lend most funds lent to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings to.
Contents

2008-04-29T03:57:00.000-07:00

Banks and card companies should give customers examples of what they are paying on their credit card bills, according to a representative of one debt counselling service.

James Falla, director of Thomas Charles, supported the idea of market regulators asking companies to “clearly print” the examples for card holders to avoid confusion on items such as interest rates.

Mr Falla explained: “Particularly with cards that do have high interest rates, they should be illustrating what a person is going to be paying back if they only make a minimum payment.

“That would then show us that with some of these cards, if you just make the minimum payment, it’s going to take you ten years plus to repay the amount, and you’re going to be.”

He concluded: “The card providers should spend more time illustrating the amount that people are going to pay back.”

Figures from Credit Action show that the total of personal debt in the UK increased by £122 million in the 12 moths up to October 2007.
http://fininformer.com/

Credit Card

2008-04-29T03:49:00.000-07:00

A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user's account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user) to be paid to the merchant. It is different from a charge card (although this name is sometimes used to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to 'revolve' their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the ISO 7810 standard. The most common credit card size, known as ID-1, is 85.60 × 53.98 mm.
Credit cards are issued after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card.

When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates his/her consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a Personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a 'Card/Cardholder Not Present' (CNP) transaction.

Electronic verification systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or Point of Sale (POS) system with a communications link to the merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is in the United Kingdom and Ireland commonly known as Chip and PIN, but is more technically an EMV card.

Other variations of verification systems are used by eCommerce merchants to determine if the user's account is valid and able to accept the charge. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder.

Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user's bank accounts, thus avoiding late payment altogether as long as the cardholder has sufficient funds.