International Economic Outlook

By Simos, Evangelos O.; Triantis, John E. | The Journal of Business Forecasting Methods & Systems, Summer 1997 | Go to article overview

International Economic Outlook


Simos, Evangelos O., Triantis, John E., The Journal of Business Forecasting Methods & Systems


I. Developments and Prospects of Integration in the European Union

The growth of output in the group of industrial countries is likely this year to reach its long-term potential of about 3% because of an expected strong acceleration of growth in Europe and an exceptionally rapid expansion in the United States in the first quarter. Although the US growth is forecast to substantially slowdown in the second half of this year, acceleration of growth in Europe will result in an overall rate of expansion in the industrial countries of 2.7-3.0% during 1997-98. European economic growth is expected to accelerate from 1.6% in 1996 to 2.8% in 1997 and 3.2% in 1998. Japan, which continues to lag behind Europe and North America, is expected to grow by 2.1% this year and 3.2% in 1998. US economic growth is forecast to weaken from 2.4% in 1996 to 2.2% in 1997 and 1.3% in 1998.

Despite social and political strains, the member countries of the European Union (EU) have made impressive efforts towards meeting the economic convergence criteria that are needed to participate in the creation of the European Monetary Union (EMU). The process of economic and monetary integration in Europe began in 1988 with the creation of the Delors committee for the study and development of a plan to implement an Economic and Monetary Union for the members of the European Community. In December 1991, the leaders of the member states signed in Maastricht the treaty on European Union, which formalized their intentions to create the EMU by the end of this century in three stages: stage one, which begun in 1990 was characterized by the completion of the "Single Market" or the so-called "Europe 1992" and the participation of currencies in the Exchange Rate Mechanism (ERM). Based on the Maastricht Treaty, stage two began in 1994 with the creation of the European Monetary Institute (EMI), the forerunner of the European Central Bank (ECB). The Monetary Committee, which consists of senior civil servants from central banks and ministries of finance, and the EMI have been charged with the design and implementation of the single European currency.

In stage three, EMU will become reality. The exchange rates of the participating members will be pegged to each other irrevocably at the time of the conversion. Individual currencies will be replaced with a "single currency", named ECU, and its value against the US dollar will be the same as the market value of the ECU at the time of the transition. Monetary policy decisions will be made by the supranational ECB. This final stage of European economic integration will start on January 1, 1999.

Prior to the establishment of the EMU, in accordance to the Maastricht Treaty, the member countries have to meet a set of designated convergence criteria for the creation of monetary union. The decision on which member country meets the criteria will be taken at the latest by July 1, 1998. The progress that each country has made in meeting the criteria, therefore, will be based on information regarding economic performance statistics on 1997 and early 1998. The member countries that do not meet the entry conditions will be excluded from EMU and referred to as "states with derogation" until they fulfill the convergence criteria.

In accordance with the Maastricht Treaty, the convergence criteria for entry into the EMU are:

1. Inflation to be no more than 1.5% points above the average of the three lowest inflation rates in the EU member states

2. Long-term interest rates to be no more than 2% points higher than the average of the three lowest inflation rates in the EU member states

3. Budget deficits should not be more than 3% of the member country's GDP.

4. Government debt should not be more than 60% of the member country's GDP.

5. Exchange rates must have remained within the "normal bands" of the Exchange Rate Mechanism (ERM) for at least two years without realignment. …

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