Academic journal article Contemporary Economic Policy

EMU, Maastricht, and the 1996 Intergovernmental Conference

Academic journal article Contemporary Economic Policy

EMU, Maastricht, and the 1996 Intergovernmental Conference

Article excerpt

I. INTRODUCTION: EMU BACKGROUND

The Werner Report (1970) was the first concrete attempt to achieve greater monetary and economic integration between member countries of the European Union (EU). During the Werner Group negotiations, two groups formed opposing views on strategies to attain Economic and Monetary Union (EMU) (see Tsoulkalis, 1977; De Grauwe, 1990). The "monetarists" believed that early progress in the monetary field would force an effective coordination of economic policies. The "economists" believed that harmonising economic policies should take priority before any coordination of Community monetary policy was embedded in the system.

The Delors Report (1989) provided further impetus towards monetary unification in Europe. In essence, the Delors Report was a blueprint for a "monetarist" approach (of a gradualist kind) to EMU. The U.K. government and the Bundesbank (German central bank) raised two dissenting voices against the Delors Report. The U.K. government objected that the report ceded monetary sovereignty to a European monetary institution and implicitly sought to abolish national currencies. The U.K. government proposed an alternative that embodied the Hayekian parallel-currency principle and came to be known as the "Hard Ecu" plan. Observers soon realized that the "Hard Ecu" proposal was unacceptable to most of the U.K.'s European partners.

The Bundesbank objected to the Delors report from the "economists'" view. It advocated incorporating strict criteria into the plan before countries could proceed towards monetary union. It also sought greater European political integration so that European Central Bank (ECB) could be answerable to a European Parliament that possessed real powers.

At the December 1991 inter-governmental Conference (IGC) in Maastricht, conferees agreed on a compromise that satisfied most parties. It called for attaining five convergence criteria before countries could proceed to monetary union. The U.K., still dissatisfied, negotiated an opt-out clause. After the surprise Danish referendum refusal to ratify Maastricht in June 1992, the Danes also negotiated an opt-out clause, and a second Danish referendum of May 1993 approved the opt-out formula.

II. EUROPEAN MONETARY UNION

All the original signatories to the Maastricht Treaty now have successfully ratified the Maastricht Treaty. On January 1, 1994, the EMU process began as stage 2 of the Treaty provisions established the European Monetary Institute (EMI).

A. The Ma-astricht Approach

Several alternative blueprints for a path to EMU include (i) the "Maastricht" approach (time-specified/gradualist), (ii) the Hayekian "Hard Ecu" approach (competition/gradualist); and (iii) the "Hawaiian" approach (shock-therapy). The paths can vary as to both speed of transition and route taken to the final objective However, the speed and route are not mutually independent. Two basic approaches affect the speed at which a monetary union is adopted: the "gradualist" approach which specifies a timetable whereby established criteria must be achieved before the next stage can begin, and the "shock-therapy" or "Hawaiian" approach, which does not specify a timetable. The "Hard Ecu" approach is based on Contemporaneous currency circulation and therefore might be considered gradualist, but no certainty exists that the process actually will yield EMU because conceivably it could reverse.

The Maastricht Treaty envisioned one particular path to EMU consisting of three stages: In stage 1 (July 1,1990 to December 31, 1993), the EU Member States abolish all remaining capital controls, strengthen monetary co-operation between the EU national central banks and permit realignments of the exchange rate mechanism (ERM). In Stage 2 (January 1, 1994 to between January 1997 and January 1999), the EMI is established is a temporary institution to oversee transition to stage 3, all Member States start the process leading to independence of their central banks, the Commission and the EMI establish whether the Member States have achieved or are moving towards achieving certain criteria as specified-in the Treaty, and ERM realignments are vigorously resisted. …

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