EMU
The creation of a single European currency, the euro, managed by a European Central Bank (ECB), and the coordination of economic policies of participating member states which must respect rules on convergence. The exchange rate parities of eleven participating national currencies were irrevocably fixed on 1 January 1999 and—following the admission of Greece—the euro replaced national currencies in the twelve ‘Euro-zone’ member states during the first months of 2002.
The EMU project of the Maastricht Treaty involved the replacement of national currencies by 1997 at the earliest—by unanimous vote if a majority of countries met the convergence criteria and were able to begin—or by 1999 at the latest, automatically for those countries meeting the criteria. The project consisted of three stages: the first, which had already started in 1990, involved the liberalization of capital flows within the European Community and improved coordination of national economic policies (reinforced mutual surveillance) with the aim of sustainably low inflation rates. The second stage began 1994 and involved the creation of the European Monetary Institute (EMI) which would make the technical preparations for EMU and the introduction of the single currency, the move to national central bank (NCB) independence, and the reinforcement of economic policy convergence. The third stage, beginning either 1997 or 1999, would involve the irrevocable fixing of exchange rates, the transfer of monetary policy-making power from NCBs to the ECB and the eventual introduction of the hard single currency and the withdrawal of national currencies.
EU member states failing to meet the convergence criteria 1999 would be admitted only when they succeeded in doing so. These criteria were public spending deficits below 3 per cent of GDP; public debts below 60 per cent; inflation of within 1.5 per cent of the average of the three countries with the lowest rates; nominal interest rates on long-term government bonds within 2 per cent of the average of the three countries with the lowest rates (an indicator of the perceived durability of convergence); and exchange rate stability—no devaluation or severe tension within the ERM—over at least a two-year period prior to the start of EMU. Some margin of manoeuvre was allowed: on excessive deficits as long as they were declining ‘substantially and continuously’ or were considered to be ‘exceptional and temporary’; and on excessive debt on the condition that this was ‘sufficiently diminishing’ and approaching the 60 per cent figure at ‘a satisfactory pace’. The intention was to admit high debt countries such as Belgium and Italy. However, this margin of manoeuvre was limited considerably when the German government—responding to domestic political pressure rooted in the concern that EMU would fail to maintain the monetary stability achieved over many years by the Bundesbank—insisted that the 3 per cent deficit be strictly respected as a condition of participation in Stage Three and beyond. The German government also insisted upon the adoption of the Stability and Growth Pact, agreed in December 1996, which enabled the Council to impose fines on countries which failed to respect the deficit criterion except in the case of a significant decline of the country's economy.
While the negotiations on EMU began prior to German reunification, and the project was set out by national central bank governors in the Delors Committee's report of April 1989, some observers have claimed that the geo-political dynamics of the early 1990s increased support for the project in countries like France, worried by the new dominance of a united Germany, and helped to convince the German Chancellor, Helmut Kohl, of the need for EMU to bind Germany to the EU and reassure Germany's neighbours. The British and Danish governments were resolutely hostile to the project and insisted upon their right to opt out of the third stage as the precondition for their accepting the Maastricht Treaty. Sweden, which joined the EU in 1995, also decided not to participate in the Euro-zone.
The creation of EMU has been justified in functionalist terms as the crowning of the Single European Market. Some economists explained the logic of monetary union in terms of the ‘triangle of incompatibility’, arguing that the pursuit of exchange rate stability in the context of free capital mobility resulted in the end of monetary policy autonomy for all countries participating in the ERM except the country with the hardest (anchor) currency: Germany. In such circumstances, it made sense to move to a single currency in order to avoid the instability created by periodic bouts of currency speculation and to ‘pool’ control over monetary policy at the European level. However, many economists, principally Anglo-American, criticized EMU on the grounds that the single currency area (the Euro-zone) would not be an optimal currency zone, as it lacked the capacity to cope with asymmetrical internal shocks due to inadequate EU budget transfers, poor labour mobility between member states, and the constraints imposed on national economic policy-making.
In operation, EMU and the ECB have been the object of much criticism. The euro lost over 20 per cent of its value in relation to the American dollar between 1 January 1999 and early 2002. The decline was explained in various ways: the confusion created by the virtual nature of the European currency; the lack of confidence in the Euro-zone's economies and the inadequacy of national structural reforms; the confusion created by the ‘communication’ problem of the Euro-zone (the frequent verbal blunders made by Wim Duisenberg, the ECB's first president, and the conflicting and often confusing messages coming from national governments on ECB monetary policy); as well as the perception of the ECB's excessively rigid pursuit of low inflation.
The Maastricht Treaty and the Stability and Growth Pact require all EU member state governments to submit medium-term stabilization plans to demonstrate their intention of ensuring sustainably low budget deficits (and ideally surpluses during periods of economic growth). While it is unlikely that recalcitrant governments will be fined for breaking the deficit criterion, there is considerable pressure from the ECB, the European Commission, the other member states and international financial markets to discourage the member states from doing so. To date Ireland has been criticized for failing to control its inflation problem, while in February 2002 Germany and Portugal narrowly escaped the Council's official sanction—recommended by the European Commission—given the size of their public deficits, approaching 3 per cent in the context of a prolonged recession.
— David Howarth
