The Euro as a system innovation –

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University of Groningen

Faculty of Management and Organisation MSc BA Strategy and Innovation

1st Supervisor: Dr. H. Snijders

2nd Supervisor: Dr. T.L.J. Broekhuizen

The Euro as a system innovation –

A new approach for guiding European integration projects?

Master Thesis - Final version

Groningen, 28 August 2010

Brenda Bos S1605186

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The Euro as a system innovation – a new approach for guiding European integration projects?

PREFACE

A big part of the Master Strategy and Innovation is the master thesis. From the beginning of this Master I was interested in innovations and ideas that fundamentally change society. So when I had to choose a topic for my thesis, these were the types of innovations I wanted to write about. In the Field Course, which preceded the start of thesis, I was searching for a suitable case study to examine system innovations. Several ideas were discussed, but these were all very standard and had been studied before. Suddenly, the idea that the creation of the Euro could be a system innovation crossed my mind. And when I conducted a small search in the existing literature, I realized that a case study like this had never been related to the literature before. It was a complex topic, but it would also be a challenge. Besides, I have been interested in the European Union and its projects for years, so it was an opportunity for me to find out more about its foundations.

Now, seven months since the start of my research, I can state that this thesis, and especially this topic, was a real challenge. Especially the overload of available information was sometimes very difficult. Furthermore, I did not expect beforehand that this topic would become so present in the international media these last months, which was due to the European debt crisis. This thesis will not elaborate on these recent activities, but it focuses on the creation of the Euro. In other words, it analyzes the activities that lead to implementation of one single common currency in Europe. But while reading this thesis, the foundations of the causes of the recent crisis might appear to you, since current failures are very often caused by past developments.

I could not have created this thesis without the help of the others. First of all, I want to take my supervisors, Hendrik Snijders and Thijs Broekhuizen, for their critical comments and their ideas definitely helped me to improve the quality of my work. Furthermore, I want to thank my family and friends for checking the grammar of my thesis, sharing and discussing ideas, keeping me company in the library, and above all, giving me moral support. I really appreciate your help!

For now, I hope you will enjoy reading the results of my research and it will surely broaden your view on European integration and system innovations. At least, it changed mine.

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ABSTRACT

This thesis analyzes the creation of the Euro and the EMU as a case study to research system innovations and transitions. First of all, the existing literature on transitions and system innovations was discussed, which resulted in the formulation of a number of characteristics and success factors of system innovations.

A system innovation could be characterized as a radical, organizational exceeding, system change that is uncertain, complex and long-term. Furthermore, many actors are involved and co-evolutionary processes are present. An analysis of the case study proved the presence of these characteristics. In this way, this study showed that the creation of the Euro could be seen as a system innovation.

The following success factors, which speed up the innovation process, were identified: multi-actor knowledge; agreement on the goal and concretization of plans; forerunners and promoters; commitment; and, the creation of a common ground. This thesis proved that the presence of each of these factors was required for the Euro and the EMU to become a success.

Finally, this research discussed the lessons that can be learned for future projects of the European Union. Successful measures from the case study were complemented with measures from Transition Management, which resulted in the formulation of advices to speed up future European integration projects.

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1 INTRODUCTION

Approximately a decade ago the interest in transformations of societal systems increased. The impacts of persistent, structural problems that our society is facing, become more and more visible. This makes policy makers, organizations and researchers realize that solutions are needed (Geels 2005). Examples of stubborn problems in the Netherlands are the long traffic jams in the rush hours every day and the waiting lists in the Health Sector. Also, on a larger scale, the exhausting fossil fuel resources are a persistent global problem.

The last decades parties tried to solve them individually by incremental changes, but these are not sufficient and can worsen the current situation. In order to solve these problems and realize a transition to a sustainable system, a factor 10 improvement is needed. A system innovation is said to have the capacity for this improvement (Geels 2005).

A system innovation is an organization exceeding innovation. It is realized by the collaboration of a variety of participants within the system. These participants include individuals, organizations, and governments. This innovation will fundamentally change both the structure of the system and the relations among the participants (Loorbach and Rotmans 2006). Due to its large scale and the involvement of many different parties, the process of a system innovation is complex and uncertain (Meijer et al. 2007).

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In previous studies on transitions and system innovations, technology is mostly taken as an entry point. Technological changes and their interrelationships with other elements in a system are analyzed (Geels 2005, Van Driel en Schot 2005, Raven 2006). Other, more recent, studies have recognized this bias towards technological innovations and have shown that transition theories also hold for non-technical types of innovations (Geels 2007, Joore 2008, Schot and Geels 2008). This thesis elaborates on these research efforts on non-technical system innovations. I intend to apply a different type of innovations to existing theories about system innovations. Not only will this research have an international focus, the political and financial natures of the case study are also different from previous case studies. Although hardly linked to the field of innovation, this thesis suggests that the creation of the Euro might be seen as a system innovation.

The Euro, like other system innovations, was created to solve a persistent, structural problem. In the 1960s, currency problems between became worse between European countries. Exchange rates were highly volatile and this caused high inflation and unemployment in many European countries. Soon the consciousness rose that a system change was necessary to solve these structural currency problems. Already in 1970 the Werner plan, which suggested to create a single European currency, was presented. But it took more than thirty years before European citizens could actually pay with Euros (Marsh 2009). The effects of this innovation were large; the Euro redrew the international monetary landscape. Its implementation affected every citizen and organization of the participating countries, and even of non-participating countries, in multiple ways (Cyr 2003).

At first sight, many characteristics of system innovations appear in the process of the creation of the Euro. These initial similarities are the foundation of this research. This research will explore in-depth the applicability of the system innovation-concept to the Euro. The fact that this is a historical case study makes it easier to recognize patterns and effects. A better understanding of historical system innovations will enhance the success of managing future system innovations. Also analyzing the development process of the Euro as a result of activities of an interrelated system can provide new insights in the management of complex projects like the Euro.

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Therefore, the main research question is:

Can the creation of the Euro be seen as a system innovation and what lessons can be learned for future European integration projects?

The main research question is divided in three sub-questions:

- To what extent can the creation of the Euro be seen as a system innovation?

- What was the influence of success factors on the creation of the Euro?

- What lessons can be learned for future European integration projects?

The first sub-question will investigate to what extent the case study of the Euro is applicable to the existing literature on system innovations and transitions.

In the second sub-question I will analyze what the influence is of success factors of system innovations in the case study. The success factors are identified in the literature. The presence of these factors speeds up the innovation process, while their absence delays the process.

The third sub-question will deal with the implications of applying a system innovation approach to future European integration projects. It combines the experiences of the case study and the ideas from Transition Management. After answering these sub-questions, the main research question can be answered.

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2 LITERATURE REVIEW

This section will provide a literature review about transitions and system innovations. Books and academic articles will be used. First, this area of research will be introduced shortly. The remaining part of the chapter has been divided in three parts: the Multi-Level Perspective, system innovations and Transition Management.

The roots of transition research can be found in multiple fields. The main concepts originate from population dynamics and Complexity and System Studies (Rotmans 2003). Also institutional theory, evolutionary economics and sociology of technology contributed (Geels and Schot 2007). In economics and business, the transition concept was mainly focused on transition economies, but nowadays it is often used in the field of Technology Innovation (Rotmans 2003). Besides, Geels et al. (2008) suggest that in addition cultural and political studies should be used.

Van den Bergh and Kemp (2006) categorized previous research on system innovations or transitions in three areas of research:

1) Historical research of past transitions. This type of research aims to provide theoretical as well as policy insights. It focuses in particular on the nature of transitions and the role of co-dynamics of sub-systems. Also visions, expectations, and collective action in bringing about transitions are important topics in this area.

2) Systematic analysis and monitoring of current transitions and analysis of hypothetical, future transitions. These studies have a focus on mobility, health care and agriculture.

3) Research on the governance of transitions, which especially looks at the co-dynamics of sub-systems.

They also state that the focal point in existing literature shifted from a sustainable ‘end state’ to the transition process itself. Current transition research, for example Transition Management, is aimed at assessing the processes that initiate, foster and direct transitions as well as the barriers against transitions. Rotmans (2005) states that research in this area is still in a pre-paradigmatic phase and a lot of research needs to be done to gain more insights in transitions and system innovations.

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projects. Their long-lasting involvement in this field contributed a lot to the knowledge about transitions and system innovations.

The introduction chapter discussed the need for transitions to more sustainable systems and the existence of persistent, structural problems. According to Rotmans (2005) persistent problems share the following common characteristics:

- These problems are present for a long time, often even for decades;

- Many different parties are involved in the control of these systems, but the steering capacity of the individual parties is relatively low;

- The relationships between the parties are largely fixed and there is little flexibility for each actor;

- Usually the parties negotiate about the short-term, incremental changes or improvements to the existing system;

- A coherent vision of the long-term future of the specific system is missing; - For a long time, the rules, the parties and the structures have been the same;

- Complexity and the related uncertainty are insufficiently recognized and monitored by the parties;

- Interests of the suppliers outweigh the interest of the (end)users; - Real choice and participation of the (end)users are missing; and - Economic interests and values override societal interests and values.

These characteristics indicate that a solution should be integral, because the system as a whole needs to change, and radical, because also underlying institutions, values and standards need to change. A system innovation is said to meet these requirements (De Bruijn et al. 2003). Before we elaborate on this type of innovation, a general description of transitions is given and the MLP framework will be discussed.

2.1 Transitions

A transition is a structural change from an old societal system to a new societal system. This change occurs either when a regime is transformed (by existing actors) or through a replacement of the old system by a new system (Bergman et al. 2008). This transition is resulting from interactive and reinforcing developments in the fields of economy, culture, technology, institutions, nature and the environment.

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et al. (2005) take a more functional perspective and define transitions as major, long-term changes in the way societal functions such as transportation, communication, housing and feeding are fulfilled. Often a transition consists of multiple system innovations.

This transitional change occurs in a continuous, gradual way (Ieromonachou 2004) and is not caused by one-time events. One-time events can only accelerate or decelerate the transition (Loorbach and Rotmans 2006). Transitions demand a long time frame, because existing boundaries, barriers, institutions and relations need to be broken (Rotmans 2003). Therefore, transitions usually take one or two generations (Tukker and Butter 2007).

Both transitions and system innovations know market failures as well as system failures. Market failures are caused by suboptimal functioning of the market, because the market invests too little in innovation or R&D. System failures result from structural flaws in societal systems. These failures can be present in the economic, the political/administrative or the innovation system (Rotmans 2005).

Loorbach and Rotmans (2006) state that two types of transitions exist. The first type are evolutionary transitions, which means that outcomes are not (significantly) planned. The second type are goal-oriented transitions, which are planned, and this is, in most cases, done by public actors. Geels and Schot (2007) state that no transition is planned from the start, but at some point every transition becomes coordinated through the alignment of visions and activities of different actors.

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In addition, Meijer et al. (2006) categorized perceived uncertainties according to their source. The source is the domain of the organizational environment, which the decision-maker is uncertain about. They distinguish six categories: technological uncertainty; resource uncertainty; competitive uncertainty; supplier uncertainty; consumer uncertainty; and political uncertainty. Their study shows that in the pre-development stage of a transition technological and political uncertainties are dominant. In this phase awareness rises that new directions are needed and new options and varieties emerge. Therefore technological variety is large and it is very uncertain which options will receive support. Also consumer uncertainty is present, since it is difficult for consumers to express their needs in the pre-development phase. The other types of perceived uncertainties are less important in this phase.

2.2 The Multi-Level Perspective

The Multi-Level Perspective (MLP) is frequently used as a tool to study transitions and system innovations. The Multi-Level Perspective analyzes how and why societal systems change. This theory was firstly presented by Rotmans et al. (2001). The use of this sociological theory shows that although technological innovations were very important in transitions of socio-technical systems, the changes in culture, behavioural patterns and policy turned out to be even more important (Geels 2005b). According to Genus and Coles (2008) the MLP represents an attempt to integrate the different strands of evolutionary innovation studies with the more sociological approach of science and technology studies, in order to bring together themes in the study of technological change.

Central in the framework is the socio-technical system. This system is the object that will be fundamentally changed, which means a radical shift in the dominant structure, actors and practices of the system (Loorbach and Rotmans, 2006, Haxeltine et al. 2008). A system consists of several elements, which are stated in table 1. These elements are created, maintained and refined by the actors in the system. These tangible elements are needed to perform a particular societal function (Geels and Kemp 2006).

The framework of the Multi-Level Perspective is based on a number of concepts, which are multi-actor, multi-level and multi-phase. Now each of these concepts will be explained.

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represented in table 1. These groups together fulfill a societal function such as transportation, communication, housing, energy supply, and feeding (Geels 2005b).

A socio-technical system… …consists of the

following elements:

Regulations and policies

Maintenance and distribution networks Production system and industry structure Market and user practices

Infrastructure Artefacts

Culture and symbolic meaning … is (re)produced by the

following social groups:

Supply chain Users

Societal groups Public authorities Research

Finance and capital Production

Table 1: Elements and social groups in a socio-technical system (Adapted from Geels 2005b)

The second concept are the multiple levels of the framework. The framework consists of three levels:

- Macro-level: the socio-technical landscape; - Meso-level: the socio-technical system or regime; - Micro-level: the niches.

The socio-technical system as the present societal system and its elements are aforementioned in this chapter.

The socio-technical landscape consists of a set of deep structural trends external to the regime, which means that they cannot be influenced by the social groups in the socio-technical system (Geels 2005). There are three kinds of macro-level factors at the landscape level:

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The components of the landscape are determined by the chosen unit of analysis (van Driel and Schot 2005). Furthermore, the content of the landscape is heterogeneous and may include a wide variety of aspects such as economic growth, broad political coalitions, cultural and normative values, environmental problems and resources scarcities (Geels and Kemp 2006).

At the niche level, new innovations emerge. These niches offer protection for inventions and act like incubation rooms. According to Geels (2005) there are two forms of niches: technological and market niches. Through several processes and mechanisms, which will be discussed later, these niches can possibly become regimes.

The socio-technical system, which is also called ‘regime’, is relatively stable. The stability of the system provides orientation and coordination to the activities of relevant social groups (Geels 2005b). The stability is the result from the alignment between rules (Geels 2005). Geels (2007) identified three different types of rules:

- Regulative rules, including formal rules, regulations, standards, laws and sanctions;

- Cognitive rules, including belief systems, problem agendas, guiding principles and search heuristics;

- Normative rules, including role relationships, behavioural norms, values, authority systems, duty, and codes of conduct.

Due to its stability, radical innovations rarely take place at the regime level. Mostly innovations at this level will be incremental in nature. Although the rules in the regime are very stable, they might de-stabilize for a number of reasons. There may be internal tensions due to limited options to further optimize the dominant design or there may also be external dynamics from the landscape level. In niches, however, rules are less stable. These rules may stabilize as a result of three internal niche processes identified by Schot et al. (1996 cited by Raven 2006): the voicing and shaping of expectations, network formation and learning. Verbong et al. (2008) state that these three patterns can also destabilize the rules: expectations may be too high and cause a backlash; learning processes can be of a low quality and have therefore limited impact; and finally, networks are often closed and narrow.

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example by internal drivers such as price/performance improvement, but also linkages with ongoing processes at the regime level can benefit (Geels 2005b). Furthermore, developments at the existing regime and the socio-technical landscape play an important role in the success of a novelty (Geels 2005). Different interactions between the three levels can lead to different outcomes, which will be explained elaborately later on page 17 and 18.

Figure 1: The three levels of the Multi-Level Perspective as a nested hierarchy (Geels 2002).

The third concept comprises the multi-phase aspect. Several researchers suggest that there exist four different phases in the transition process (Geels 2005, Loorbach et al. 2008, van Lente et al. 2003, Kemp and Rotmans 2009, Meijer et al. 2006)

- Pre-development phase: The novelty emerges in niches. Often novelties emerge to solve small problems in the existing regime. The regime remains stable, but the social landscape changes slowly. Several novelties can co-exist at the same time.

- Take-off phase: This phase takes place in small market niches. Especially, technical specialization and exploration of new functionalities may occur. Several trajectories are competing, which results in the establishment of a dominant design. Niche rules may stabilize and learning takes place.

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The following circumstances have been identified as important to create windows of opportunity: internal technical problems in the existing regime; problems external to the system and policy measures to deal with them; changing user preferences and emerging markets; strategic and competitive games between firms; and availability of complementary technologies.

- Stabilization phase: the speed of change decreases and the established regime is gradually replaced. A new dynamic equilibrium will be reached.

These four phases look together very similar to the well-known s-curve model. This ideal description of the four phases represents the classical pathway for transitions. However, other pathways can also be defined and these will be discussed further on.

Figure 2: The Multi-Level Perspective (Geels 2002)

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opportunity for the novelties at the niche-level. Novelties take advantage of these windows of opportunity and break through. This will lead to a transformation of the regime. Finally, a new regime stabilizes and might influence the landscape. This framework also shows that not every novelty will become a new regime or will be adopted by the regime. Often a novelty fails to become a regime (Geels and Schot 2007).

Transitions can take several types of pathways. These pathways can be distinguished on the basis of two criteria (Geels and Schot 2007):

- Timing of the interactions: different timings of multi-level interactions result in different outcomes. Particularly important is the timing of landscape pressure on the regime with regard to the state of the niche-development.

- Nature of interaction: landscape developments and novelties in the niches can have reinforcing/symbiotic and disruptive/competitive relationships with the regime.

The combination of these criteria leads to different pathways. Also the social group that took the initiative impacts the change process (Geels and Kemp 2006). Over time, several classifications of transition pathways have been made (Geels 2005, Geels and Kemp 2006, Raven and Verbong 2007). An adapted version of the most extensive and recent categorization is discussed in table 2 (page 18).

An addition from Raven (2007) and Raven and Verbong (2007) to the original framework is the role of multi-regime interactions as mechanism for triggering change in socio-technical regimes. Two or more regimes can interact with each other and their relation can change over time. Four different types of interactions have been identified:

- Competition: regimes start to fulfil similar functions and begin to compete with each other. - Symbiosis: two regimes reap mutual benefits from the existence of the other party;

- Integration: two previously separated regimes become one. This can be a partial or a completely integration.

- Spill-over: one regime transfers experiences or rules to another.

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Niche-level Regime-level Landscape Result

Reproduction process - Dynamically stable. No external pressure.

System will reproduce itself

Transformation path

Novelties have not yet been sufficiently developed. Incumbents adjust regime rules, because outsiders voice criticism. Moderate landscape pressure. Regime actors

transform the regime.

De-alignment and re-alignment path

Novelties are not sufficiently developed. De-alignment of regime due to increasing problems. Divergent, large and sudden change. Emergence of multiple niche-innovations, which co-exist and compete. Eventually, one novelty becomes dominant and forms the core for re-alignment of a new regime. Technological substitution (classical pathway) Niche-innovations have developed sufficiently. Downfall of incumbents at regime level. High pressure from landscape. High level of landscape pressure will create space for novelty to break through and replace existing regime. Reconfiguration pathway Novelties emerge. Novelties are adopted in the regime, as an add-on or component replacement, to solve local problems. Landscape pressures will force the regime to adapt the system.

New regime gradually grows out of the old regime. Sequence of transition pathways - - Disruptive change at landscape. Disruptive change at the landscape level, which can result in a sequence of transition pathways.

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As stated before, the socio-technical system is very stable and it is very difficult for novelties to break through. Novelties are therefore said to be ‘locked-out’. There are several strategies for dealing with the lock-out of novelties. The most important ones are niche accumulation and hybridization. Niche accumulation contains that innovations improve, learn and stabilize in multiple niche markets until it is ‘strong’ enough to invade the mainstream market. Receiving feedback is hereby very important. There is a danger that the novelty remains stuck in the small market niches and will never reach the main market. In the second strategy, hybridization, the innovation starts close to the existing regime and is used as an add-on to the technology of the regime. Over time, it aims to diverge and bend existing trajectories towards more desirable ones. A pitfall of this strategy might be that the novelty will always stay an add-on and will never be able to transform the regime. Also the existing system can improve itself and make it deliberately more difficult for novelties to break through. This is called the sailing ship effect. Niche accumulation and hybridisation strategies should be seen as extremes. Often a mix of the two strategies is used (Raven 2007b).

Another approach that tries to help new technologies break through and that takes into account that new technologies cannot immediately compete with established technologies, is Strategic Niche Management (SNM) (Schot and Geels 2008). Strategic Niche Management is based on SCOT theory, which focuses on interactions between social groups, and evolutionary economics, and states that new technologies require protection. The core idea of Strategic Niche Management is that protected spaces should be created that allow nurturing and experimentation, while technology, user practices and regulatory structures co-evolve. In this way ‘sustainable innovation journeys’ can be facilitated (Schot and Geels 2008). In protected experimental settings, called “niches”, actors can learn about the design, user needs, cultural and political acceptability, and other important aspects. In this way, actors can learn how to cross barriers, find support and build strong networks. The Strategic Niche Management also aims to identify the strategic factors that are likely to have an impact on the regime shift. Examples of these strategic factors are: niche formation, partner interaction, expectations and motivations, societal embedding and learning (Ieromonachou 2004). Since SNM focuses on concrete technologies and means that are available, it is the opposite of the backcasting approach, which will be discussed later on page 27 (Quist and Vergragt, 2004).

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is too focused on the design and production of the new technology and that other groups are also important. Furthermore, the perspective is said to have a bias towards the novelty. The focus is on one promising novelty, but there could co-exist multiple novelties at the same time. Other critics stated that the perspective should be further differentiated and that there is not one pathway a transition could follow. These criticisms have led to the development of several types of transition pathways (Geels and Schot 2007). Markard and Truffer (2008) state that Multi-Level Perspective does not look at roles and strategies of individual actors. They suggest to combine MLP with more actor-centered theory, such as the Technological Innovation Systems approach. However, also Transition Management, which will be discussed later in this chapter, takes the individual actions of actors into account. Furthermore, Markard and Truffer state that further conceptualization of the MLP is necessary in order to make it easier to generalize the outcomes of studies. Geels (2007) states some further propositions for future research, including multi-regime interactions, differentiation of the types of transition paths, and the widening of the concept of niches. The first two propositions have already been discussed. The latter has received some attention in recent publications. A study of Ieromonachou (2004) took policy niches instead of technology niches as a focal point. A study of Geels (2007) distinguished music niches besides technical niches and showed that the Multi-Level Perspective can also be applied in other fields. This widening of the concept of niches provides new opportunities.

To conclude, the Multi-Level Perspective provides a framework that analyzes transitions across multiple phases, across multiple levels and through the interaction of multiple actors. Understanding the patterns and mechanisms in a transition process can help to manage transitions. One method to manage transitions is Transition Management, which will be discussed in this chapter. Now system innovations will be discussed.

2.3 System innovations

According to the literature transitions require system innovations. System innovations are necessary to achieve substantial change in society (Loorbach and Rotmans 2006, Joore 2008, VROM 2001). Usually a transition consists of a number of system innovations (Loorbach et al. 2009).

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They make a distinction between:

- Incremental innovations: these are small, more or less continuously innovations. They are of great importance in improving efficiency and quality. Although their combined effect is big, no single incremental innovation has a substantial effect.

- Radical innovations: these innovations are the result of R&D activities and are discontinuous events. Often they involve a combined product, service and organizational innovation. They bring about structural change, but their impact on the aggregate economy is relatively small. - New technology systems: these changes are far-reaching changes in technology. They affect

several branches of the economy and give rise to entirely new sectors. They are based on a combination of radical, incremental, organizational and managerial innovations, and will affect many firms.

- Changes in techno-economic paradigms: these changes affect the behaviour of the entire economy. This type of change embodies many clusters of radical and incremental changes and might eventually embody a number of new technology systems.

According to this classification, system innovations belong to the third category. System innovations fundamentally change the structure of the system (Loorbach and Rotmans 2006). It is a co-evolutionary process, which involves technological changes, as well as changes in many other heterogeneous elements (Geels 2005b). An example of a system innovation in the Netherlands is the introduction of the OV-chip card in the public transport (Raad voor Verkeer en Waterstaat 2005).

System innovations are defined as organization exceeding, qualitative innovations, which are realized by a variety of participants within the system and which fundamentally change the relation between the involved companies, organizations and individuals (Rotmans 2003, Loorbach and Rotmans 2006, Habiforum 2003 cited by Priemus 2007). It often involves not only ‘hard’ innovations, such as technologies, but also ‘soft’ innovations, such as principles, rules and organizational forms (Rotmans 2003).

To put it another way, system innovations differ in a number of ways from ‘normal’ innovations according to Rotmans (2003):

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- They do not focus on present or potential market demand, but on the development of public goods or services that do not have a well-functioning market yet.

In order to solve a complex problem, a system innovation requires the involvement of many different actors, including governments, companies, NGOs and citizens, which each have to contribute their unique inputs (Joore 2008). Their various contributions consist of different kinds of knowledge and skills. This multi-disciplinary knowledge is required by system innovations (Habiforum 2003 cited by Priemus 2007). It is important that the innovation is integral and that the participants change their perspective and culture (NRLO 1999 cited by de Bruijn et al. 2003).

First, actors have to agree on the nature and the size of the problem (Rotmans 2003). In most cases, the nature of the problem is for all actors clear and a lot of information about the problem is available. But agreeing on a solution is more difficult (Raad voor Verkeer en Waterstaat 2005). Collective learning plays hereby an essential role since it helps to develop knowledge about causes, linkages and patterns. It also helps to construct shared meanings and clarify common ground and differences in perspectives, interests and needs of participants (Svendsen and Laberge 2005 cited by Loorbach et al. 2009).

Actors have to agree on the long-term aims, the means and the necessary resources. Especially the willingness of every actor to participate and to make the necessary resources available is very important. Therefore, the plans need to have a clear structure (Rotmans 2003). Ros et al. (2009) state that an important element of system innovations is the focus on system options as potential goals, which makes it a goal-seeking process. Other conditions for multi-stakeholder processes are the clarification of the roles and responsibilities of each actor and the agreement on shared rules and norms and collective learning (Gray 1989 cited by Loorbach et al. 2009). Through this interaction, participants build trust and commitment, which is crucial for effective collaborate action (Loorbach et al. 2009). Suurs et al. (2004) also recognize the importance of a high willingness of the actors to participate, because this will lead to a higher acceptability of the novelty. Besides, political and societal support is very important to realize a system change (Raad voor Verkeer en Waterstaat 2005).

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when overestimated expectations are not met soon enough. System innovations therefore require broad support to overcome such barriers and that is also why the participation of many different actors is important. On the other hand, if many actors are involved, it is important that a great majority of them supports the innovation. Besides, forerunners that take a leading position are essential for a successful system innovation (Rotmans 2003). A graphical representation of the different phases of a transition process and different end positions is given in figure 3.

Figure 3: The different phases and end positions of a transition (Rotmans 2005).

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At last, van den Bosch et al. (2005) suggest that small innovation steps might be crucial in starting off a system innovation. These steps might be more effective in terms of budget, time and stakeholder commitment. Besides, small steps can encourage learning-by-doing, which is also an important characteristic of transitions. Their research suggests that both industry and government should have a long-term vision, commitment and a pro-active role. But according to de Bruijn et al. (2003) system innovations are not always the result of a plan, but they can also emerge spontaneously. Furthermore, they state that if a government wants to participate in a system innovation, it should always cooperate with private parties.

To conclude, system innovations seem to provide an integrated and collaborative solution to societal systems that need to be transformed. In particular, the literature on system innovations describes the importance of identifying the problem and the formulation of goals and the necessary means. It focuses on the content of the system innovation. Transition Management provides a useful addition, since it also pays attention to the processes that create system innovations.

2.4 Transition Management

The Multi-Level Perspective analyzes the causes and drivers for transitions and makes an assessment of the state of a societal system. Once these are identified, opportunities arise to influence them so that innovation processes will speed up (Loorbach et al. 2009). A method to steer transitions is Transition Management, which evolved from the research on transitions. Steering in this context does not mean controlling, but it means influencing (Rotmans 2005). According to Loorbach et al. (2009), Transition Management aims to change the dominant culture, structures and practices of unsustainable systems by linking innovations at the micro-level to macro-micro-level changes in mindsets. But actors should be cautious for side effects of steering, since only the direction and speed of a transition can be influenced (Loorbach and Rotmans 2006). Essential in Transition Management is that the content needs to be explicitly linked to the process itself (Rotmans 2005).

Transition Management proposes an operational model with four main activities, which include (Rotmans 2003, Loorbach and Rotmans 2006):

- Organizing and developing a transition arena for a certain transition theme; - Developing long-term visions;

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- Monitoring and evaluating the transition process.

It can be seen as a cyclical process as shown in figure 4. In these processes searching, experimenting and learning play a central role rather than a deterministic, blueprint-based method (Rotmans and Kemp 2008).

Figure 4: Operational Transition Management model

Structuring of problems & organizing transition arena’s Raising and implementing transition experiments & mobilizing networks Monitoring, evaluating, learning & adaptation Development of coalitions, visions, transition agenda’s & transition paths

These activities take place at three levels according to Rotmans (2005) and Loorbach et al. (2009). At the strategic level, the aim is to establish a transition arena around a particular societal issue. A few forerunners from different societal sectors need to develop a vision and goals at societal system level. Van de Kerkhof and Wieczorek (2005) state these visions should have a time span of at least 30 years. They also list four criteria for visions; they should be imaginable, inspiring and innovative, consistent and transparent, and finally, qualitative.

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Finally, at the operational level, concrete experiments should be conducted, which aim at stimulating and developing new collaborations, coalitions, networks and arrangements. It focuses on the implementation of the action plans. These experiments are very costly and time-consuming (Rotmans 2005).

It is very important that the transition process is evaluated and measured. In the beginning qualitative indicators will be more important than quantitative indicators. Qualitative indicators are for example concerned with change in perspectives and behaviour, outcomes of experiments, different forms of learning, et cetera (Rotmans and Kemp 2008).

A system innovation is usually undertaken by a variety of players without a clear hierarchy and structure. The control power is therefore distributed over various actors, which makes a classical top-down method very difficult to implement. It is also not always clear who is inside and who is outside the system. Transition Management tries to make use of these particular characteristics by stimulating the collaboration between the various partners (Rotmans and Kemp 2008). Different roles and practices are required from the involved participants, such as companies, scientific institutes, governments or NGOs. Also these roles and practices can change over time (Loorbach et al. 2009).

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Besides this timing problem, some other barriers are identified by VROM (2001); there is a shortcoming in the set of instruments, the problem causers are often not the problem solvers, the presence of many uncertainties, institutional shortcomings, and the lack of precautions.

So far, most of the Transition Management projects in the Netherlands, and recently some projects have started in Belgium, are initiated and authorized by the government. This might be a disadvantage, since regime actors are most likely to be involved in the project, which might dilute the radical potential of system innovations (Rotmans and Kemp 2008). Hendriks and Grin (2007) suggest therefore that institutions should be self-critical and self-conscious and reflect their processes, when they are steering transition processes.

Several approaches have been suggested by Transition Management studies to minimize the gap between visions and action plans and improve the transition process:

- Niche experiments can help (Ros et al. 2009). This can for example be done by Strategic Niche Management, which has been discussed previously on page 19. The Raad voor Verkeer en Waterstaat (Advisory Council for Transport, Public Works and Water Management) (2005) states that a bed should be created in which experiments can take place. This will create room for new ideas, but also room for failures.

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- The composition of the group of participants should be a balance between homogeneity and heterogeneity. The latter will bring more alternative viewpoints and ideas, but a certain degree of homogeneity is needed, which will provide them with a common ground for discussion and actions. Participants need good communication skills, since interaction is important (van de Kerkhof and Wieczorek 2005).

- Although initially the government took an important role in facilitating and organizing transition processes, researchers argued that there is no such thing as a gatekeeper. Rotmans (2003) proposes that a small core group with representatives from different social groups should deal with the selection of participants. Van de Kerkhof and Wieczorek (2005) suggest that the facilitation by an independent and neutral organization can improve the transition process. This can, for example, be done by intermediary organizations, which act as a broker between various parties. These systemic intermediaries can connect, translate and facilitate flows of knowledge. These organizations could be public or private (van Lente et al. 2003, Raad voor Verkeer en Waterstaat 2005).

- Space should be created for forerunners. This seems to be of crucial importance (de Bruijn et al. 2003, Rotmans 2005). Not only financial space is needed, but also mental, organizational and juridical space. Especially if the regime strikes back by building new institutional constituencies, which is also known as the sailing ship effect, the free space for forerunners is reduced. Forerunners need to be provided with multiple resources which make them better equipped in comparison to the regime (Loorbach and Rotmans 2010).

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To conclude, Kemp and Rotmans (2009) presented five rules of thumb, which are essential for transition management:

- Long-term thinking as the basis for short-term policy;

- Think in terms of multiple domains, different actors and different levels; - Learning as an important aim for policy;

- Orient policy towards system innovation besides system improvement; - Keep options open.

2.5 Conclusion

In this chapter I reviewed the literature on transitions and system innovations. This research field itself is still in a pre-paradigmatic phase, but increasing understanding is gained in the way these processes work. In the first years, only a few researchers were engaged in this field of research, but more researchers started to get involved over time. Also other research fields start to mingle with this field, which increases acceptability and attention for transitions and system innovations.

The review was divided in three sections. First I discussed the Multi-Level Perspective. This theory analyzes structural, complex, long-term changes of societal systems. These changes last in most cases at least one or two generations and involve many actors and domains. This theory proposes a framework for analyzing transitions, which is based on a combination of a multi-phase, multi-actor and a multi-level concept. Since the first publication on this theory, many variations and extensions have been added. The literature also suggests that still additions could be made to create a more realistic framework. The Multi-Level Perspective is mostly used to analyze historical transitions. In that case, all the effects are visible and nothing can be altered in the process, which is necessary to use the MLP.

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System innovations…..

Characteristics

Aim to solve a complex problem that is present for a long time and cannot be solved by a single actor.

Fundamentally changes the structure of the system and the relations between the involved parties.

Are a co-evolutionary process, which means that many elements of the system are changed, and it affects many different domains of society.

Are influenced by developments at the landscape and niche level.

Success fac

tors

Require multi-actor knowledge contributed by the wide variety of actors that participate.

Need agreement on a common goal and in order to achieve this goal, concrete action plans have to be made.

Are stimulated by forerunners that take a leading position and promoters that actively support the innovation.

Can only be achieved when the majority of the actors is willing to participate. A common ground between the actors is needed.

Table 3: List of the main characteristics of system innovations

Characteristics are in this context defined as typical features of system innovations which can help to identify them and to differentiate them from ‘normal’ product or process innovations. Success factors are defined as factors that stimulate and speed-up the introduction and the realization of system innovations. They can be seen as necessary requirements for a successful system innovation. But there is no empirical study yet that states that the presence of all the identified success factors is required to secure the success of a system innovation, which makes this study explorative. This also indicates that there might be even more success factors.

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Figure 5: Conceptual model

LANDSCAPE PRESSURES

SYSTEM INNOVATIONS

CHARACTERISTICS

Finally, I discussed the Transition Management approach in this chapter. This approach describes ways to steer transitions and system innovations in terms of the speed and the direction of the change. It proposes the use of a cyclical process, consisting of four activities: the establishment of a transition arena, the creation of a long-term vision, the enactment of experiments, and the monitoring and evaluation of the transition process. Although it is very difficult to manage such huge changes, insight in the effects of (policy) activities could provide a general understanding what to do or what not to do. This approach will be mainly used to answer the third sub-research question, which focuses on the implications of applying a system innovation approach to future European integration projects.

System change Complex and long-term

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3 METHODOLOGY

In this chapter the methodology of the case study will be described. The case study in this thesis is the creation of the Euro and the European Economic and Monetary Union (EMU). A necessary condition to create a common currency is the existence of an EMU. Therefore, this thesis will also analyze the creation of the Economic and Monetary Union in Europe.

This research comprises the development process before the actual (physical) introduction of the new currency. In other words, how did this innovation come about? By studying the development process, I try to identify to what extent the Euro can be seen as a system innovation.

As already described in the beginning of the literature review, previous research on system innovations could be categorized in three areas. A case study on the Euro could be placed in the first category, which includes historical research of past transitions and system innovations. Especially the way in which transitions and system innovations come about play a central role in this type of research. Visions, expectations and actions are indicators that are used to study this process. The findings aim to provide theoretical as well as policy insights.

For studying transitions and system innovations, often process theories are used. Process theories, unlike variance theories, focus on events. Events are enacted by actors who make decisions, undertake actions and react to others. Process theories explain outcomes as the result of temporal sequences of events and the timing and conjunctures of event-chains. The notion of path dependency is hereby important (Verbong et al. 2008). The Multi-Level Perspective is an example of a process theory, since it focuses on interactions between niches, regimes and a landscape (Geels and Schot 2007). Geels (2005b) characterizes this theory as working from ‘the outside in’ by describing, mapping and analyzing the entire transition process.

Variance theories explain outcomes as the product of independent variables acting on dependent variables. Hereby researchers mainly make use of quantitative data. On the other hand, process studies are chiefly using qualitative, interpretive methods, such as case studies. These methods are rich in context and make it easier to trace events and interactions (Verbong et al. 2008).

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former president of the Dutch National Bank, André Szász. Other books are written by academics and take a more analytical perspective. Often these books are based on interviews with important players and economists.

Secondly, official and internal preparatory documents of European institutions, such as the European Central Bank (ECB), the European Monetary Institute (EMI), the European Commission and National Central Banks. These documents show the agreements, deadlines and progressions that are made. It also provided insights in motivations and roles that are taken. The fact that the introduction of the Euro was about ten years ago, made it easier to gather data. Furthermore, special reports on the development of the Economic and Monetary Union and the Euro have been written over time. These reports analyze the state of the process and the different options. The European Commission published their historical documentation online, which resulted in a database with more than a hundred documents about the development of the EMU and the Euro. This database includes the major documents leading towards the EMU, analyses and suggestions on alternative system options, reports on the progress of individual countries and internal preparatory documents. Although this documentation was not a complete complication of all documents relating to the introduction of a single currency in the European Union, it provided a clear picture of the ongoing processes and discussions.

(Recently) published interviews with for example presidents of national banks or members of the board of the European Central Bank in newspapers or magazines were analyzed as well. Opinions about the recent problems concerning the Euro also revealed issues that were important for the creation of the Euro. Furthermore, important speeches are used.

Finally, articles in academic and European journals provided additional information. The articles provided a more critical view on the process, because these also included opponents of the Euro and the EMU. A critical view was necessary to be able to identify the causes of failures and successes in the process.

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Since the case study is complex and longitudinal, the researcher chose to conduct one case study instead of multiple case studies. Also the nature of the research was explorative, and therefore the discovery of future research tasks was more important than a formal structure. In future studies, the findings could further investigated and compared with other cases (Blumberg et al. 2005).

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4 CASE STUDY – A GENERAL DESCRIPTION

European countries are increasingly integrated in different areas, which may in the end lead to the ultimate of integration, a political union. But integration is not a simple process and takes a long time. The creation of an Economic and Monetary Union (EMU) is one step in this long integration process.

In an EMU, members eliminate all tariffs and other restrictions on internal trade, adopt a set of common external tariffs, and remove all restrictions on the free flow of capital and labour among each other (Ghauri and Cateora 2006). An EMU can, but not necessarily, include the introduction of a common currency.

The case study will analyze the creation of an EMU and the introduction of a common currency, the Euro, in Europe and its potential of being a system innovation. It will focus on the development period, which is the time period from the first proposal to the actual introduction of the single currency.

This whole process took about forty years. This chapter will therefore provide a summary of the most important developments during these years in order to provide a useful background for the remaining part of this thesis. The developments are divided into four chronological time periods.

4.1 The old system and the first attempt called the Werner Plan

After two World Wars, some European countries began to realize that in order to prevent a new war, European cooperation was necessary. Because integration in the military field was not feasible, soon the integration of European economies seemed a plausible solution. The French proposed and realized European Coal and Steel Community (ECSC) in 1952, which aimed for cooperation in the field of coal and steel, both essential materials for warfare. In addition, the relation with the United States deteriorated, and independence from this nation seemed attractive. On the 25th of March 1957, the cooperation was extended: six European countries signed the Treaty of Rome for the creation of European Economic Community (Szász 2001). The six partners included France, West-Germany, Italy, the Netherlands, Luxemburg and Belgium. They aspired growth and prosperity for all participating countries (Mulhearn and Vane 2008). For a number of sectors, especially in the agricultural field, common policies were made.

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meant that the values of all currencies were tied together. The dollar was the key currency in the system, which implied that in reality all other currencies were related, with a fluctuation margin of 1%, to the dollar (Husted and Melvin 2007). For about twenty-five years, this system was quite effective. But several international macroeconomic forces, such as the Vietnam War, emerged in the late 1960s and destabilized the system. These tensions caused devaluations, speculations and high rates of inflation and unemployment.

In addition, increasing international transfers put a lot of pressure on the old system. Eventually the accumulation of these factors caused the fall of the Bretton Woods system in 1973. Since then, the world knew a floating exchange rate system. Opponents claimed that floating rates would create greater stability, give greater autonomy to countries to conduct economic policy, and depoliticize exchange rate management, since market forces now determined the rates (Commission of the EC 3 February 1978). But this solution was only partial and not sustainable. The international monetary system was said to be in ‘chaos’. There existed no rules (Commission of the EC 3 April 1978). It was clear that a new sustainable system was needed.

Two reports, conducted in 1962 and 1972 by the Monetary Committee, showed that the monetary systems of the Member States of the European Community were very heterogeneous: the division of responsibility for monetary policy between the central bank and the government differed, investing habits from the public differed, and the structure of the banking system and the capital market differed. Furthermore in some countries, the State could exercise significant control over monetary issues. For example, in France and Italy, the central bank and the government worked in closely cooperation. On the other hand, in the Netherlands and Germany the central bank was independent of the government. Luxemburg had no central bank of its own and followed the central bank of Belgium, which pursued a strategy between the two extremes. A comparison between the different monetary systems was not easy, since members used different terminology. The objectives of monetary policy were surprisingly quite similar: economic growth, price stability, a high rate of employment and external equilibrium of the economy. But there were some differences in the way these objectives were formulated and which objective received priority (Monetary Committee 1 July 1962, 1 January 1972). In order to realize an Economic and Monetary Union, the different national monetary systems need to converge. But as history shows us, this was not an easy task.

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The critics on this plan were that it was not radical enough, since the plan did not call for real integration of the European economies (Uri 1969).

Further discussions of the Barre Plan resulted eventually in the publication of the Werner Report on 8 October 1970, which was written by the group of experts led by Pierre Werner. The report was based on common ideas of the group and took the increasing interpenetration of European economies and the loss of autonomy at the national level as a starting point. According to the Group, not enough progress on harmonization and liberalization was realized. They furthermore stated that the whole process should be irreversible and the establishment of a sole Community currency would be favourable due to psychological and political reasons. This implied a transfer of responsibility from the national to the Community level. They suggested that the first stage would start on 1 January 1971 (Werner Report 1970). Although all institutions and committees at the Community level supported this plan, national governments were not very willing to proceed toward an EMU. Also external circumstances, such as the monetary crisis of May 1971, impeded the realization of this plan (Wittelsberger 1971, Commission of the EC 8 March 1975). When the European Monetary Cooperation Fund was set up in 1973, the Member States still did not want to give up their sovereignty and the Fund only received a limited amount of tasks. This made the Fund not very effective (Monetary Committee of the EC 2 March 1973).

In addition, the Werner report suggested that the first step towards an EMU involved the coordination of economic policies and aimed to reduce fluctuations between currencies (Mulhearn and Vane 2008). Tight fluctuation margins, ±2,25%, were set around the dollar, which looked like a snake twisting in a tunnel. That is why the system became known as ‘the Snake’ (Szász 2001). Besides, at that time, the European Community was enlarged for the first time. Denmark, Ireland and the United Kingdom joined the other six members. These countries also joined the Snake (ECB 2009). But the Snake was not a very successful, since continuously currencies left and re-entered the system (Szász 2001).

Although some other reports of the Commission reaffirmed that an EMU would be created no later than 31 December 1980, real progress toward this goal was not achieved (Commission of the EC 30 April 1973, 8 September 1977).

4.2 The second attempt: the EMS

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approach, which would contain all currencies of the participating countries (Commission of the EC 23 January 1975, 2 May 1978, 5 August 1978).

Since it was easy for currencies to leave the Snake, the new system had to be more permanent and strict. This would also lead to greater convergence of the European economies, a necessary condition for creation an EMU (Commission of the EC 20 February 1978).

The discussion resulted in the introduction of a European Monetary System (EMS) on 1 January 1979, an initiative from Germany and France, with the ECU at the centre of the system (Issing 2008). The ECU (European Currency Unit) was based on the currencies of the Member States of the European Communities and each national currency would float freely within a given margin around the ECU and was obliged to intervene if a certain limit was reached (Monetary Committee of the EC 7 September 1978). Also a European Monetary Cooperation Fund (EMCF) was set up at this date to manage the issue of ECUs (Commission of the EC 31 October 1978). The EMCF was given limited responsibilities and a new powerful institution was not created. With the Basle/Nyborg agreements of September 1987, which introduced some additional rules, the EMS worked quite well until the introduction of the EMU in 1992. But it was not the fundamental change that Europe needed (Commission of the EC 8 March 1989). The development of the EMS showed that Member States acknowledged that something had to change.

Besides, the European Community was enlarged in 1981, when Greece joined, and again in 1986, when Spain and Portugal joined. Now the European Community consisted of 12 members (ECB 2009). These new participants became also involved in developing new plans, which increased complexity.

4.3 The third attempt: The Delors report

In the mid 1980s a new spirit for integration rose. In June 1984 the committee Dooge set up to make proposals for improved integration (Szász 2001). This led to the Single European Act of 1986, which stated that the Community should be developed from a customs union into a common market, in which there was free movement of capital and labour. It also mentioned the ambition for a single currency (Mulhearn and Vane 2008). Another stimulant was the arrival of Jacques Delors as the President of the European Commission. Delors was a proponent of the EMU and wanted to enhance the cooperation between members. The first years after the Single European Act can be characterized as a search for the content of a new system. This search was mainly conducted by France and Germany (Szász 2001).

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consisted of the twelve central bank governors, two members of the European Commission and three independent experts and was led by Jacques Delors (Thygesen 1989). The report of the committee was published on 17th of April 1989 and suggested a step-by-step approach towards an EMU. The members agreed unanimously on the basic characteristics of the system, such as binding rules for fiscal policy, independence, price stability and a European system of central banks. A common currency was according to the Committee not necessary, but it was desirable (Delors Report 1989). The Report had a major impact on further development of the EMU. Since the members agreed unanimously on the characteristics on the system, there existed high trust by national politics in this plan and the Report was adopted in June 1989 in Madrid (Mulhearn and Vane 2008, Commission of the EC 1 January 1989). Only the government of the United Kingdom was against the Report, but in order to prevent isolation they decided to temporarily accept the Report and attempted to delay the integration process (Thygesen 1989).

4.4 The EMU and the Euro

The main characteristics of the system were now defined, but a timeframe did not exist. The first stage of the Economic and Monetary Union started on 1st of July 1990 and focused on the coordination of monetary policies of member states (Mulhearn and Vane 2008).

In 1989 and 1990 the German reunification played an important role in the international politics. The economic circumstances in the former two parts were so different, that inflation and unemployment began to rise dramatically after the reunification. This also affected the other members of the EMS. The German reunification accelerated the preparations and negotiations, since France saw opportunities to connect the German reunification to the European integration process.

The Euro as a system innovation –

The Euro as a system innovation –

A new approach for guiding European integration projects?

Master Thesis - Final version

PREFACE

ABSTRACT

TABLE OF CONTENTS

1 INTRODUCTION

2 LITERATURE REVIEW

Characteristics

Success fac

tors

LANDSCAPE PRESSURES

SYSTEM INNOVATIONS

CHARACTERISTICS

3 METHODOLOGY

4 CASE STUDY – A GENERAL DESCRIPTION