The creation of a single European currency, the euro, managed by an independent European Central Bank (ECB), and the coordination of economic policies of participating member states which are expected to 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. There are presently fifteen member states, with Slovenia joining the Euro‐zone in 2007 and Cyprus and Malta in 2008.
The EMU project of the Maastricht Treaty involved the irrevocable fixing of exchange rates of national currencies from 1997—by unanimous vote if a majority of countries met the convergence criteria and were able to begin—or by 1999, 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 in 1994 and involved the move to national central bank (NCB) independence, the reinforcement of economic policy convergence, and the creation of the European Monetary Institute (EMI) which with the European Commission would make the technical preparations for EMU and the introduction of the single currency. The third stage, beginning either in 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.
European Union (EU) member states failing to meet the convergence criteria in 1999 would be admitted into Stage Three only when they succeeded in doing so. New EU member states were expected to join EMU—part of the acquis communautaire—but would initially only participate in Stage Two, proceeding to Stage Three individually once the criteria were met. These criteria are 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 Exchange Rate Mechanism (ERM; ERMII post‐1999)—over at least a two‐year period. 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 into Stage Three. 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 Germans also insisted upon the adoption of the Stability and Growth Pact, agreed in December 1996, which from 1999 enabled the Council to impose fines on member states which failed to respect the deficit criterion except in the case of a significant decline in the size of a member state's economy.
Subjects: Politics — Law.