Monetary Union - a successful venture for Europe?

A broad EMU is now in prospect when the single European currency is launched in 1999, including ten or eleven EU member states. The UK could also join early in the next century "if EMU is a success". This article describe the path to monetary union and discusses the potential problems and opportunities raised by this ambitious project. Distinguishing between technical and economic success, it outlines three potential sources of tension and difficulty for those joining in the first wave, and argues that Britain will not be able to avoid its effects even though it will not be joining initially.

The Euro is Coming! The single European currency now looks set to become a reality at the beginning of 1999 - the culmination of a ten-year process of planning and preparation. The first step was taken in the late 1980s, when the members of the European Union (or European Community as it was then known) signed up to the conclusions of the Delors Committee report and endorsed its three stage plan for Economic and Monetary Union (EMU). The second key step was the agreement and ratification of the Maastricht Treaty in the early 1990s, which set out the timetable we are now working to and the conditions for participation in EMU. Next Spring will see the third key step when the European Council agrees which countries will participate in the "first wave" of EMU member states at the beginning of 1999.

The road to EMU has not been smooth. The potential obstacles and pitfalls have included the deepest post-war continental European recession in the early 1990s, record levels of unemployment in Germany and France, ballooning budget deficits in many countries and the currency turmoil of the 1990s. Keeping the EMU process on track over this period is a major political achievement.

As the launch date of 1 January 1999 approaches, however, the nature of the debate is changing. It is no longer a question of whether EMU will take place or even when. Now the question that is being asked is "what will EMU be like"? In particular, will the single currency be a successful project for the European Union (EU) as a whole?

A Broad EMU is in Prospect

The background to this issue is the fact that a broad EMU is now in prospect, including 10 or 11 EU member states. Britain, Sweden and Denmark have ruled out entry in the "first wave", partly for political reasons. Which of the other twelve countries qualify will depend on their ability to meet the "convergence criteria" laid down in the Maastricht Treaty - conditions for inflation, interest rates, exchange rate stability and public finances. On these grounds, Greece is a clear failure. It meets, none of the necessary conditions. Which of the remaining eleven meet the criteria depend on how the Maastricht Treaty is interpreted.

Inflation and interest rate convergence in Europe has been very impressive, with Italian inflation now below the rate of price increases in Germany. On these criteria, no country (bar Greece) is likely to face any qualification problem. But when we look at the Maastricht conditions on exchange rates and public finances things begin to look much more muddy.

The Maastricht Treaty set the condition that …