The Convergence Criteria of the Maastricht Treaty and the European Monetary Union
According to the ‘irreconcilable triad’ (Mundell 1963,1968), the following three conditions cannot be satisfied in a group ofcountries at the same time: fixed exchange rates, perfect capital mobility and central bank autonomy.
In the European Union (EU), perfect capital mobility was achieved at the beginning of the 1990s, within the Single Market framework (see Chap. 1). It was, paradoxically, the EMS crisis of 1992-1993 that stimulated the further integration required by the Maastricht Treaty, since intermediate or provisional regimes, like quasi-fixed exchange rates, are unsustainable in the long run: the monetary union would have implied irrevocably fixed exchange rates ‘for ever’ and the contemporaneous delegation of monetary policy to a supranational entity. Based on the old ‘Werner plan’ (1969) and on the more recent ‘Delors Report’ (1989), the Maastricht Treaty, signed in February 1992, envisaged the creation by the end of the century of the ‘Economic and Monetary Union’ (EMU) within the EU.
According to the Treaty, the monetary union should be accompanied by an economic union. The latter required completion of the Single Market, the strengthening of competition policy, the reinforcement of structural policies (also thanks to the newly established Cohesion Fund) and the coordination of macroeconomic policies. As for the monetary unification, the Treaty opted for a gradual and conditional approach to the integration. The three steps foreseen were as follows: (i) in 1990-1992, the removal of obstacles to the free movement of capitals and the prohibition of monetary financing of public deficits; (ii) in 1994-1998, establishment of the European Monetary Institute (based in Frankfurt) for preparation of the technical and legislative requirements in view of the introduction of the common currency; (iii) from 1999 onwards, the adoption of irrevocably fixed exchange rates and the creation of the European Central Bank (ECB), responsible for the common monetary policy.
Transition from the second to the third phase was possible for countries satisfying the following ‘convergence criteria’ (the so-called ‘Maastricht criteria’): (i) an inflation rate no more than 1.5% points higher than the average rate of the three countries with lowest inflation; (ii) a long-term interest rate on public debt no more than 2% points higher than the average rate of the three countries with lowest inflation; (iii) a public deficit no higher than 3% of GDP, save in exceptional and temporary circumstances; (iv) a public debt no higher than 60% of GDP or in downturn towards that ceiling; (v) an exchange rate within the normal floating interval of the EMS for at least 2 years.
The inflation rate requirement was proposed to ensure that admitted to the monetary union would be countries with a preference regarding inflation similar to that of core countries (in particular Germany). The purpose of the interest rate condition was to prevent large capital gains or losses in the transition to the common currency. The exchange-rate criterion was intended to exclude ‘last-minute’ currency devaluations. The conditions on public accounts were designed to prevent negative spillovers from indebted countries (see also the discussion in Chap. 4).5
A more general consideration is that the process of monetary unification and the related nominal convergence criteria reduced economic growth already in the 1990s (De Grauwe 2000), because of the deflationary effects of restrictive monetary and fiscal policies undertaken by several countries at the same time. In particular, peripheral countries were hurt because of the stringency of the nominal conditions; although it should be noted that the bonus deriving from ‘nominal’ convergence, especially lower interest rates, was not used by all countries to stimulate higher economic growth - also by means of structural reforms - and/or to improve public accounts sustainability (for countries with high debt levels). If in the new century such countries had continued the effort made in the convergence period to join the ‘euro club’, they would have been better prepared to deal with the subsequent crises (after 2008-2009).
In any case, the examination of the five criteria was made in May 1998. Eleven countries6 were admitted to the monetary union from the start of the EMU in 1999; Greece joined 2 years later. Although the exchange rates were irrevocably fixed on 1 January 1999, and the ECB has been responsible for monetary policy since then (see also Chap. 3), the new currency - the euro - began to circulate in 2002. In the new century many more countries (which in 1998 were not even members of the EU) joined the Eurozone: Slovenia (2007), Cyprus and Malta (2008), Slovak Republic (2009), Estonia (2011), Latvia (2014) and Lithuania (2015).