EUROPEAN MONETARY UNION CONVERGENCE CRITERIA.   Term Paper ID:22807 Click to get this paper

Essay Subject: Examines requirements for membership & compliance by Ireland, Luxembourg, Sweden & others. Goals, treaties, organization.... More...

14 Pages / 3150 Words 11 sources, 32 Citations, TURABIAN Format $56.00 Return to List of Papers

Paper Abstract: Examines requirements for membership & compliance by Ireland, Luxembourg, Sweden & others. Goals, treaties, organization. Paper Introduction: EMU CONVERGENCE CRITERIA COMPLIANCE BY IRELAND, LUXEMBOURG, AND SWEDEN Introduction This research compares progress toward compliance with the convergence criteria for full participation in European Monetary Union [EMU] by Ireland, Luxembourg, and Sweden. This comparison both (1) identifies the extent of the progress made by each country toward compliance with the convergence criteria and (2) explains the differences between the three countries within the context of the progress made toward compliance with the convergence criteria. The findings of the comparison of the progress toward compliance by the three countries are applied in the development of answers to the following questions: 1. Is it possible for the member countries of the European Comm Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The foreign currency exchange rate for an EC membercountry's currency must have remained within the narrow band (+ 2.5percent) for a period of two years without realignment. Among the three communities, however,there were some common institutions. The two questions statedabove then are discussed within the context of the compliance progressattained by the three countries. "Traders in countries with poor performanceeconomies and consequently weak currencies compared with the DM-driven coregroup, have to face two main alternatives after 1999: either their countrybeing completely involved in the new monetary union and therefore totallyintegrated into the EU economic and market system, or being outside ofmonetary union, but still being fully part of the EU's integrated marketand what will by then be left of the CAP."[25] Discussion continues within the EC about whether it is necessary for acurrency to be within the ERM for it to qualify for absorption into thesingle currency group.[26] Apart from the domestic political importance ofsuch arguments, they become economically irrelevant once currency valuesare locked together and values fixed. The theoretical-it can only be that, given thepolitical obstacles-attempt to impose a single currency system as soon as1999 will lead to levels of transfers from rich countries to poor countrieswhich would cause considerable political turbulence in Germany and theother countries who would be footing the bill."[32] Is it possible for the EU member states to meet the convergencecriteria? "The European Community: A Union Of States Without A Union Of Government." Journal of Common Market Studies 26 (1987): 1-23."Currency Union-Benefits and Risks For Agribusiness." Agra Europe (22 December 1995): 1-3."The EU's Feel-Bad Factor." Economist 336 (3 September 1995): 57-58."From Here to EMU." Economist 336 (5 August 1995): 72.Haldane, A. The answer to that question is "yes." Is it likely that amajority of the countries will meet the convergence criteria? The Treaty of Maastricht is designed to integrate the currencies ofthe member nations of the European Community, and to lead to greaterpolitical integration within the Community.[7] The convergence criteriaadopted through ratification of the treaty are as follows:[8] 1. In order to ensure the highest possible degree of macroeconomicbalance and an appropriate macroeconomic policy mix, it will be importantfor the members of the prospective monetary union to pursue more stringentobjectives for fiscal deficits than seem to be required by the provisionsof the Maastricht Treaty.[2 ] In the theory of the Maastricht Treaty, the convergence criteria "addup to good economic housekeeping. The final level of regional integration, politicalunion, involves the creation of a single government over all membercountries, and the loss of national identity for the individual memberstates of the union. [24]Ibid. At present it is quite clear that thelong-established and deep-rooted German view predominates: that thetimetable must be met and that the economies of the EU member states mustbe forced to achieve similar levels of public debt, growth and inflation inorder to meet the single currency deadline. The budget deficit criterion appears to be inreach; however, both the exchange rate and the public debt criteria remainproblematic. Inparticular, it appears possible that the maintenance of a stable exchangerate outside the ERM could satisfy the currency stability requirement.(This is particularly true of the accession agreements of Austria, Swedenand Finland.) At present the UK and Germany appear most likely to meet allthe criteria by 1996/7, although this is dependent on the degree ofstability of the sterling exchange rate in the coming year. 5. Beyond meeting the agreedceilings on budget deficits, however, a broader question concerns theappropriate degree of fiscal balance that members of the EU should strivefor over the medium term. 3. [21]"EU Feel-Bad," 58. A bias toward easyfiscal policy and tight monetary conditions would hamper growth andcomplicate external exchange rate policy vis-à-vis other major currencyareas. [6]A. But in other countries the'we'll manage it' mantra is less convincing. percent of the country's GDP. Brewin, "The European Community: A Union Of States Without AUnion Of Government," Journal of Common Market Studies 26 (1987): 1-23. If East German GDP is included, the debtratio would only be 49.1 per cent in 1994, rather than the 53.7. If it is possible for the member countries of the EuropeanCommunity to meet the convergence criteria for full participation inEuropean Economic Union, what economic policies should be implemented toenhance the probability of success in complying with the convergencecriteria? Progress Toward Compliance With the Convergence Criteria According to the Maastricht Treaty, it must be determined not laterthan the end of December 1996 whether a majority of member states of the EUmeet the conditions for participation in the third, and final, stage ofEMU.[9] To qualify for the third stage, countries must meet convergencecriteria for inflation, government budget deficits and debt, long-terminterest rates, and exchange rate stability within the ERM. [19]Ibid. Itwas not until the ratification of the Treaty of Maastricht, however, thatspecific criteria for full participation by an EC member nation in EMU wereadopted.[1] Although the EC is commonly referred to in the singular, it isactually a collection of communities formed to deal with specific commonfunctions, of which the EEC is one. 4. When dole queues are long, tax revenues are lower, and so budgetdeficits are harder to cut-especially when the criteria rule out adevaluation of the currency. The citizens of Norway in a referendum rejected membership inNovember 197 . [9]"Policies For Sustained Growth in Industrial Countries," WorldEconomic Outlook (May 1995): 24. W. "More specifically: will the German 'monetarist' view of EMUtriumph over the 'economist' view? For most countries the convergence programme to reachthe Maastricht treaty's goal of EMU by 1999 would be tough at the best oftimes, which these are not. Membership negotiations began in 197 between the six member countriesof the EC and Denmark, Ireland, Norway, and the United Kingdom [UK]. London: Longman Group UK Ltd., 1995.----------------------- [1]"From Here to EMU," Economist 336 (5 August 1995): 72. Economic integration, however, has also beenbeset with significant problems. Outside will be Britain,Italy, Ireland, Spain, Portugal and probably the three Scandinavianmembers."[29] Only a minority of countries will meet the convergence criteria by1999.[3 ] On the basis of the European Commission's projections ofinflation, budget balances and public debt to 1997 only Germany, Finland,France, Luxembourg, and the UK will have their inflation within 1.5percentage points of the average of the three lowest rates in the EU,budget deficits close to 3. Holland's only obvious problemis a public debt equal to almost 8 % of GDP. Following this explanation, theprogress toward compliance with the convergence criteria by Ireland,Luxembourg, and Sweden is described and analyzed. The derivation of the convergence criteria for full participation inEuropean Economic Union is reviewed and the criteria are both identifiedand explained in the following discussion. Is it possible for the member countries of the EuropeanCommunity [EC] to meet the convergence criteria for full participation inEuropean Economic Union? The totaldebt stock has recently risen rapidly due to the inclusion in governmentdebt of the outstanding liabilities of the east German privatisation agencyTreuhandanstalt."[15] Toward the close of 1995, however, The Economist reported that twocountries were meeting the convergence criteria, although all countrieswere experiencing difficulties.[16] "It is hard for governments to turnthings round, especially if electoral popularity and 'Euro-commitment' areseen to conflict. Sofar, only Luxembourg and Germany meet all the criteria."[17] In Ireland, both inflation and long-term interest rates are meetingthe convergence criteria. per cent of GDP, and public debts approaching6 percent of GDP at a "satisfactory pace."[31] What these figures suggest is that not even Germany "should want to goahead with full EMU by 1999, since only a minority of countries have anychance of meeting the convergence criteria. percent, while the gross debt-to-GDPratio is projected to exceed the 6 percent criterion in all but four orfive countries.[1 ] According to the Maastritch Treaty, however, the debt criterion may beconsidered satisfied if the debt ratio is sufficiently diminishing andapproaching the criterion value at a satisfactory pace. In 1996, EU budget deficits are expected toaverage over four percent of GDP on current policies, well above theconvergence criterion value of 3. G. Thefour non member countries on 22 January 1972 signed a Treaty of Accessionto the EC. [18]"Policies," 25. "The Exchange Rate Mechanism Of The European Monetary System: A Review Of The Literature." Bank of England Quarterly Bulletin 37 (1991): 73-82."Maastricht: Europe Celebrates." Economist 328 (22 May 1993): 55, 57."Policies For Sustained Growth in Industrial Countries." World Economic Outlook (May 1995): 9-34.Scott, A. The accumulated public debt of a member country of the ECmust not exceed 6 . Most importantly, they re-affirmed the 1999 starting dateand the use of the term Euro for the European currency which in theory willreplace national currencies during 2 2. The latter will pose a serious obstacle for a number ofcountries. Although mostcountries meet or are close to meeting the inflation and long-term interestrate criteria, significant reductions in government budget deficits anddebt-to-GDP ratios, or both, are needed in most EU members to meet thefiscal criteria. (London: LongmanGroup UK Ltd., 1995), 178. [2]C. 2. It isimportant to note that the German debt to GDP figures are for the ratio oftotal debt to West German GDP. Italy, Sweden, and Greece are still a long way frommeeting the deficit criterion. EMU CONVERGENCE CRITERIA COMPLIANCE BY IRELAND, LUXEMBOURG, AND SWEDEN Introduction This research compares progress toward compliance with the convergencecriteria for full participation in European Monetary Union [EMU] byIreland, Luxembourg, and Sweden. The danger is in fact that thefrantic attempts to meet the criteria by the new deadline will, in itself,set up the sort of economic disequilibrium that will lead to divergencerather than convergence. [17]Ibid. The ECSC was thefirst of the communities, and when it was formed was comprised of the samesix member countries that were to form the EEC and EURATOM. Or in other words, will the impositionof a single currency be used to force the economies of the EU intoconvergence, or will convergence be regarded as a prerequisite for theestablishment of a single currency? Belgium is hoping, despite Mr Waigel'swarnings, that its mountain of public debt will be politely overlooked.Spain and Italy would like the EMU timetable to be delayed so that in theinterval they can somehow, perhaps, get their figures right. [4]D. Of these three countries, however, only Spain participates in the ERM-Spain's ERM participation began in June 1989. The findings of the comparison of the progresstoward compliance by the three countries are applied in the development ofanswers to the following questions: 1. [13]Ibid. percent of the country's gross domestic product (GDP). Sweden and Austria became members on 1 January 1995. Bibliography"A Blueprint For Europe: When The Dreaming Has To Stop." The Economist 322 (15 December 199 ): 14-15.Barrell, R., Pain, N., and Morgan, J. Urwin, The Community of Europe, 2nd ed. [5]A. Simply meeting the 3. [25]Ibid., 2. percent deficit target bythe latter part of this decade would still leave significant underlyingimbalances, as such an outcome might coincide with a relatively high levelof capacity utilization as the current expansion matures. The answerto that question is "probably not," because there will be a continuinginclination every four years or so to pull back from the harsh economicpolicies that will be required to meet the convergence criteria. Although it would seem possible for amajority to satisfy the deficit convergence criterion by 1996, and probablyalso most other criteria, the slow pace of fiscal consolidation may delaythe third stage of EMU until 1999.[11] In November 1994, an analysis by the National Institute suggested thatnone of the EC countries would meet all the convergence criteria by1996.[12] Germany, France, and the UK, however, were thought to be goodcandidates meet all the criteria by the end of the century, and theNetherlands and Belgium, it was predicted, could qualify if they weredeemed to have made sufficient progress towards reducing their debt stocks. The Community of Europe, 2nd ed. The government of AlainJuppe in France (where unemployment is 11.4%) recently sacked its firstfinance minister, Alain Madelin, for spelling out harsh market realities,and backed away from the swift privatisation of France Telecom because theprivatised version would shed thousands of workers. A secondtemptation is to trim one's sails to the wind. Barrell, N. Haldane, "The Exchange Rate Mechanism Of The EuropeanMonetary System: A Review Of The Literature," Bank of England QuarterlyBulletin 37 (1991): 73-82. There are two major long-term goals of the EC.[3] The first is theintegration of the economies of the member countries, while the second ispolitical unity among the member countries. It involves reducing public debt to a targetof 6 % or less of GDP; restraining budget deficits to 3% of GDP; keepinginflation and interest rates low; and minimising currency fluctuations. [26]Ibid. On this basis, theEU Council of Ministers has taken the position that Ireland meets the debtcriterion, even though Ireland's debt-to-GDP ratio is still relativelyhigh. Long-term domestic interest rates must be no more than 2. In Sweden, the inflation and interest rate criteria are being met.The budget deficit criterion appears to be in reach; however, both theexchange rate and the public debt criteria remain problematic. Both the Counciland the Commission have stressed that deficits will need to be much lowerthan the Maastricht criterion value by the end of the century.Nevertheless, existing deficit reduction plans of most member states remainrelatively unambitious.[19] There is also reason for concern about the aggregate position offiscal policy across the members of the monetary union. Prior to the creation of the EEC and EURATOM, the European Coal andSteel Community [ECSC] had been created by a treaty signed in Paris in1951, and became a functional reality on 1 August 1952. There are those analysts who like to claim that the Swedish welfarestate concept is responsible for the country's problems in meeting theconvergence criteria. 2. [28]Ibid. G. In practice, it is likely thatgovernments, in an attempt to ward off domestic unpopularity-particularlyin Germany and the UK-will tack the Euro suffix onto existing nationalcurrency names to give not only the Euro-Mark, but also the Euro-pound, theEuro-franc etc."[23] It will not, however, be the name of the currency that matters.[24]Rather, what will be crucial will be the new monetary and economicprinciples and, in particular, the impact that the new currency world willhave on trading relationships. Leading Germanpoliticians are now calling on President Jacques Chirac to show some pro-Europe 'leadership.' Meanwhile, Hans Tietmeyer, the Bundesbank boss, isleading the German chorus against any weakening of the convergencecriteria."[21] The EU approved a monetary blueprint that would lead to a singlecurrency on 1 January 1 1999.[22] The expectation was that the new singlecurrency would become the general means of exchange throughout westernEurope by around 2 2. Such claims are so much rot, however, as even theUnited States could not meet the convergence criteria if such standardswere to be applied to that country, and certainly no one will claim with astraight face that the United States operates on a welfare state concept. Morgan, "The world economy," NationalInstitute Economic Review (May 1995): 51. In Luxembourg, all six convergence criteria are being met.Luxembourg, however, is more a city state than a nation, and does not faceall of the issues confronting the other EC member countries. [31]Ibid. [7]"Maastricht: Europe Celebrates." Economist 328 (22 May 1993): 55,57. [23]Ibid. An EC member country's governmental budget deficit must benor more than 3. [15]Ibid. Spain was expected to have too high a level of inflation to qualify, whileItaly failed to meet any of the convergence criteria.[13] A year later, however, the National Institute had become moreoptimistic about the fiscal position in France and Italy, reflecting fastergrowth in both countries and additional budgetary measures taken inItaly.[14] The National Institute continued to predict, however, that noEC country would meet all the convergence criteria by 1996, "although theinterpretation of a number of the criteria remains ambiguous. Domestic price inflation must be no more than 1.5 percentagepoints above the average of the three lowest rates of inflation among allEC member countries. Fiscal consolidation has not proceeded at a fast enough pace,and countries risk taking insufficient advantage of the recovery to reducetheir fiscal imbalances. [22]"Currency Union-Benefits and Risks For Agribusiness," Agra Europe(22 December 1995): 1. In the early-198 s, Greece was brought into the EC as afull member, and in 1986 both Portugal and Spain were brought in as fullmembers of the EC. "Britain and the E.M.S.: An Appraisal of the Report of the Treasury and Civil Service Committee." Journal of Common Market Studies 24 (1986): 187-2 1.Urwin, D. "Despite scepticism of some leaders-most notablythe UK's John Major-the EU leaders agreed the programme for furtherprogress on EMU. Short of leaving the currency-grid pathway tomonetary union (as Britain and Italy, to the benefit of their exporters,did in September 1992), the only way out is to keep chanting 'no pain, nogain.' Arguably, that is working in Holland. Scott, "Britain and the E.M.S.: "An Appraisal of the Report ofthe Treasury and Civil Service Committee," Journal of Common Market Studies24 (1986): 187-2 1. Its economy-if the Dutch putup with their present unemployment rate-seems to have entered a virtuouscircle of a strong currency, low inflation and declining interest rates.The government is predicting that its 'EMU- relevant' budget deficit willfall from 3.7% this year to 2.8% next year. [8]"From Here," 72. "The world economy." National Institute Economic Review (May 1995): 29-59.Brewin, C. [11]Ibid. In the summer of 1978, the member countries of the EC agreed to theformation of the EMS, and the organization became a functional reality inMarch 1979.[4] While the UK was a member of the EMS from its inception,the country was not a participant in the major function of the system-exchange rate management, which involves operation of the Exchange RateMechanism [ERM], throughout most of the organizational existence of theEMS.[5] UK participation in the ERM did not begin until October 199 .[6]Upon joining the EC, Greece, Portugal, and Spain also became members of theEMS. This comparison both (1) identifies theextent of the progress made by each country toward compliance with theconvergence criteria and (2) explains the differences between the threecountries within the context of the progress made toward compliance withthe convergence criteria. Particularly important for theeventual shape and timing of the operation of a single European currencyare the political developments within the European Union during the nextfew years. The pursuit of economicintegration has been both more rapid and more successful than has thepursuit of political unity. [16]"The EU's Feel-Bad Factor," Economist 336 (3 September 1995): 57-58. The executives of the threecommunities were merged into a single commission on 1 July 1967. The three communities-the EEC, EURATOM, and the ECSC- functioned asseparate entities until July 1967. They will be joined by France if its political system is able to withstandthe strain of the economic measures necessary to maintain the franc in theright condition for submersion in the Euro. [14]Ibid. Monetary union is a component of the regional integration of nations.The fourth level of such integration is economic union, which includes theadding of monetary and fiscal harmonization among member countries to thecommon market system. In practice, they strain most people'spatience. [1 ]Ibid. [3]"A Blueprint For Europe: When The Dreaming Has To Stop," TheEconomist 322 (15 December 199 ): 14-15. The political and social cost ofmarching to the German tune can be clearly seen in France and Belgium atthe present moment."[27] It is clear that if Germany cannot be persuaded from its determinationto achieve a single currency by the turn of the century, and France remainsa willing accomplice in this program, then the creation of a two-tier EMUis inevitable.[28] In the inner core will be Germany and its Beneluxsatellites plus Austria-"their currencies being shored up by continuousintervention of the Bundesbank in its new guise as a European Central Bank. The EEC was created with the signingof the Treaty of Rome in 1957 by Belgium, France, the Federal Republic ofGermany, Italy, Luxembourg, and the Netherlands.[2] The European AtomicEnergy Community [EURATOM] was created at the same time, by the sametreaty, and with the same membership. percentage points higher than the average of the three lowest prevailinglong-term interest rates among all EC member countries. [27]Ibid. France and the Beneluxcountries clearly follow the German doctrine, the Scandinavian countriesare not too bothered about the currency so long as they have the certaintyof fixed exchange rates, while the geographically peripheral countriesbelieve that economic convergence must not only come first but be a pre-requisite of a single currency system. W. [29]Ibid. Conclusion The convergence criteria set out in the Maastricht Treaty wereconceived as minimum requirements aimed at ensuring a high degree offinancial discipline and stability in the monetary union.[18] In light ofrecent EU surveillance activities, including the first excessive budgetdeficit procedure in the fall of 1994, it appears that the EU intends toapply the convergence requirements strictly. Pain, and J. One temptation is then tobend the Maastricht rules. Sincethat time, the goals and objectives of the three communities have beenpursued in a coordinated and cohesive manner, and all of the separatecommunities have become components of the EC. Both the EEC and EURATOM becamefunctioning realities on 1 January 1958. On the basis of current policies, only Germany, the UK, Denmark,Ireland, Luxembourg, and the Netherlands are likely to meet the deficitcriterion in 1996. [2 ]Ibid. [3 ]Ibid. [32]Ibid. [12]R. EMU Convergence Criteria European monetary union has been envisioned since the founding of theEuropean Economic Community [EEC]. The creation of the European MonetarySystem [EMS] represented a major step toward eventual monetary union. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.