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close this bookThe Courier N 145 - May - June 1994- Dossier : European Union: the Way forward - Country Report: Ethiopia (EC Courier, 1994, 104 p.)
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View the documentEuropean Union: the way forward
View the documentEurope makes its way: from Rome to Maastricht
View the documentEconomic and Monetary Union - Major features of the Maastricht Treaty
View the documentThe European Monetary Institute - The tasks ahead
View the documentThe Courier surveys the scene with the help of Egon Klepsch, President of the European Parliament
View the documentThe challenge for 1996 - A people's Europe
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View the documentThe European Union's development cooperation policy
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View the documentImages of Europe

Economic and Monetary Union - Major features of the Maastricht Treaty

Economic and Monetary Union, a political objective of the European Community for more than 20 years, is now comprehensively laid down in the Treaty on European Union (the 'Maastricht Treaty') which entered into force on 1 November 1993.

Economic and Monetary Union will enable the European Union to reap in full the benefits of the Internal Market. It ought to be possible to trade as easily between Marseille and Copenhagen as between Chicago and New Orleans. A single currency will eliminate the present costs of converting one currency into another. The uncertainty which investors feel about future exchange rate changes possibly wiping out any profits made on an international investment project will be eliminated; cross-border investment will thus be encouraged. Moreover, the ecu - as the single currency - will be one of the most widely used international currencies because it will be the currency of the biggest market in the world and it will be stable.

This article sets out the main features of the arrangements for Economic and Monetary Union as laid down in the Treaty of Maastricht.

Monetary policy

From the beginning, there has been agreement that in the final stage of Economic and Monetary union the participating countries will have a single monetary policy and a single currency - the ecu. This will require a new institution - the European Central Bank (ECB) - which will form, together with the central banks of the Member States, the European System of Central Banks (ESCB). The primary objective of the ESCB will be to maintain price stability. Without prejudice to this objective, it will support the general economic policies in the Community. The ECB and the central banks of the Member States will not take instructions from governments of Member States or from Community institutions.

The central banks of the Member States are an integral part of the ESCB and act in accordance with the guidelines and instructions of the ECB. To the extent deemed possible and appropriate, the ECB shall have recourse to the central banks of the Member States to carry out the operations which are necessary to implement the monetary policy of the Community.

The decision-making bodies of the ECB are the Governing Council and the Executive Board. The monetary policy of the Community will be formulated by the Governing Council, which is composed of the 12 Governors of the central banks of the Member States and of the members of the Executive Board. The Executive Board, consisting of the President of the ECB, the Vice-President and four other members, implements monetary policy and gives the necessary instructions to the national central banks. The term of office is eight years (non-renewable) for the members of the Executive Board and at least five years for the Governors.

The ESCB will carry out open market and credit operations at its own discretion in order to pursue monetary policy. It may also impose minimum reserve requirements on credit institutions within limits to be specified by the Council of Ministers. The ESCB's role in prudential supervision will be limited: it shall contribute to the smooth conduct of such policies and may offer advise on the scope and implementation of the relevant legislation. The ESCB Statutes include an enabling clause for more direct involvement in prudential supervision, but any such transfer of powers to the ECB requires a unanimous decision of the Council of Ministers.

Great care has been taken to strike an appropriate institutional balance with respect to responsibility for exchange rate policy in Stage Three. A distinction has been made between, on the one hand, formal agreements on an exchange rate system for the ecu vis-is non-Community currencies, and on the other hand - insofar as a formal exchange rate system does not exist - general guidelines for the exchange rate policy. In both cases, ultimate responsibility lies with the 'political' authorities of the Community, in particular the Council of Ministers. However, in both cases the ECB is protected against undue interference in its monetary policy by appropriate references to the objective of price stability.

As regards inter-institutional cooperation and democratic accountability, the President of the Council of Ministers and a member of the Commission may participate, without voting rights, in meetings of the Governing Council of the ECB. The President of the Council may submit a motion for deliberation to the Governing Council. Correspondingly, the President of the ECB will participate in Council meetings when matters of relevance to the ECB are discussed. The ECB will have to be consulted regarding any proposed legislation within its field of competence. It will be required to make an annual report to the other institutions of the European Union, and the members of the Executive Board may be asked to appear before the Committee of the European Parliament.

The financial provisions stipulate that the capital of the ECB is held by the national central banks in proportion to the size of the population of individual countries and their economic importance. The key is a weighted average of a country's share in population and GDP. The external foreign reserves of the national central banks are pooled at the ECB within certain limits. The sum of the seigniorage income of the ESCB as a whole is allocated to the national central banks according to the same key. The new Treaty does not affect national practices with respect to the distribution of profits of the national central banks.

Economic policies

In contrast to monetary policy, Member States retain ultimate responsibility for economic policies. They are, however, required to conduct economic policies with a view to contributing to the achievement of the objectives of the European Union, and to regard them as a matter of common concern. Economic policies are coordinated at the Union level. For this purpose, the European Council (which comprises the Heads of State and Government) discusses a conclusion on broad guidelines for the economic policies of the Member States and the Union proposed by the European Commission and the Council of Ministers, before these guidelines are formally adopted by the Council of Ministers in the form of a recommendation. The economic policies of the Member States are monitored regularly against this background. Where economic policies are not consistent with the guidelines, the Council may address a specific recommendation to the Member State in question.

While each Member State remains responsible for its budgetary policy, the Maastricht Treaty reflects a long and thorough debate about safeguards against unsound budgetary policies. Member States' budgetary policies are constrained by three rules:

- any extension of credit from the ECB or national central banks to public authorities is prohibited; likewise, any privileged access of public authorities to the financial institutions is banned;

- neither the European Union nor any Member State is liable for the commitments of any Member State(s) (no bail-out);

- excessive government deficits shall be avoided in the final stage.

It is up to the Council of Ministers to decide after an overall assessment whether an excessive deficit exists. This decision is based on a recommendation from the European Commission, whose task is to monitor government finances with a view to identifying gross errors. The Commission in particular examines compliance with budgetary discipline on the basis of two criteria:

- whether the government deficit exceeds 3% of GDP and, if so, whether the ratio has not declined and has not come close to 3 % or, alternatively, whether the excess over 3% is only exceptional and temporary;

- whether gross government debt exceeds 60% of GDP and, if so, whether the debt ratio is not diminishing sufficiently and not approaching 60% at a satisfactory pace.

In its report to the Council on a Member State which fails to pass this test, the Commission will also take into account all other relevant factors, including the size of the deficit relative to public investment and the medium-term economic situation and budgetary position of the Member State in question. When the Council has decided that an excessive deficit exists, it will address a recommendation to the Member State concerned, which may be made public after a certain time in the event of non-compliance. As the next step, which may only be taken in the final stage of Economic and Monetary Union, the Council may prescribe measures for the reduction of the deficit. In the event of non-compliance, it may impose or intensify one or more sanctions: it may require the Member State concerned to publish additional information before issuing bonds and securities; it may invite the European Investment Bank to reconsider its lending policy towards the Member State concerned; it may require the Member State concerned to make a non- interest-bearing deposit with the Community; or it may impose fines.

The mutual balance of payments assistance which is still available in the second stage will no longer be relevant for fully participating Member States, nor will it be available to them from the beginning of Stage Three. For the third stage, the Maastricht Treaty provides for a new financial assistance facility for Member States which are threatened or affected by severe difficulties caused by exceptional occurrences beyond their control. A decision by the Council of Ministers to grant such assistance requires unanimity except in the case of natural disasters, where the Council acts by qualified majority.

Capital movements

The Maastricht Treaty establishes the principle that all restrictions on payments and on the movement of capital between Member States and between Member States and third countries shall be prohibited. Restrictions vis-a-vis third countries may only be imposed in well-defined cases where unrestricted capital movements would invalidate measures taken in other policy areas (direct investment, establishment, provision of financial services, admission of securities to capital markets), where capital movements would cause or threaten to cause serious difficulties for the operation of Economic and Monetary Union, or in the context of economic sanctions.


The process towards full Economic and Monetary Union is divided into three stages. The first stage included all measures taken prior to the institutional and legal reforms imposed by the Maastricht Treaty (in particular the liberalisation of capital movements). The rationale behind the second stage is to prepare the Member States of the European Union for their participation in the common monetary policy. This requires, apart from far-reaching institutional changes, a high degree of convergence of their economies. The third stage starts on the day when the exchange rates of the national currencies are irrevocably fixed and competence for monetary policy is transferred to the ESCB; the ecu will become a currency in its own right on that day and will be introduced as the single currency rapidly afterwards.

The second stage of Economic and Monetary Union began on 1 January 1994, when the European Monetary Institute (EMI) was created. The basic tasks of the EMI, which has a President who is not a Governor of a national central bank, are to strengthen the coordination of national monetary policies, to facilitate the use of the ecu and oversee its development, and to prepare Stage Three. It may make recommendations to national central banks on the conduct of their monetary policies; it may make such recommendations public, acting unanimously. It shall also, by the end of 1996, specify the regulatory, organizational and logistical framework necessary for the ECB to perform its tasks from the first day of Stage Three. The EMI may hold and manage foreign exchange reserves as an agent for national central banks, and will be endowed with its own financial resources.

The provisions on the coordination of economic policies, including the setting of guidelines, have been applicable since November 1993, when the Maastricht Treaty entered into force.

From the beginning of Stage Two, the principle of freedom of capital movements applies (Portugal and Greece may maintain existing restrictions for another 2 years); central bank credits to public authorities and privileged access to financial institutions are prohibited; the no bail-out rule applies; budget deficits are monitored and the Council of Ministers may decide that an excessive deficit exists and address recommendations to the Member State in question. However, the unconditional ban on excessive deficits and the possibility of imposing sanctions will only apply from the start of Stage Three.

A further important instrument in the preparation of the national economies for the third stage are the so-called Convergence Programmes. According to the Treaty, before the start of the second stage Member States were supposed, if necessary, to adopt multi-annual programmes intended to ensure the lasting convergence necessary for the achievement of Economic and Monetary Union. Almost all Member States have done so, and the programmes, which are updated if necessary, allow the progress of individual countries to be monitored with a view to their full participation in the third stage.

During Stage Two, Member States will, as appropriate, have to start the process leading to the independence of their national central banks, so that their national legislation is compatible with the Statute of the ESCB when the ECB is established.

Having considered before the end of 1996 the state of convergence of the Member States, and provided a majority of Member States passes a convergence test, the Council consisting on this occasion of Heads of State or of Government) will decide by qualified majority vote whether it is appropriate for the European Union to move to the final stage of Economic and Monetary Union and will, if so, set a date for the beginning of Stage Three. A country's convergence is examined in particular by reference to four criteria: a rate of inflation close to those of the three best performers, sustainability of government financial position, successful participation in the narrow band of the EMS for at least two years, and long-term interest rates close to those of the best performers in terms of price stability.

Member States not ready economically to participate from the start will be exempted from the provisions on monetary policy and on sanctions with respect to excessive deficits. Specific rules will apply to the UK should that Member State exercise its right to abstain from Economic and Monetary Union at the beginning of Stage Three. For Denmark, which has exercised its right to request an exemption, the provisions on a derogation will apply. The UK and Denmark - should neither participate from the start - will not be included among the majority of Member States when it is decided before the end of 1996 whether a majority passe the convergence test.

All central banks, including those not in involved applying the common monetary policy, will be members of the ESCB from the start of Stage Three. Likewise, all Governors will be members of the General Council of the ECB, which will be its third decision-making body and whose task will essentially be to contribute to the ESCB's tasks other than monetary policy in the strict sense.

If there is no decision at an earlier date, then 1 January 1999 will automatically become the starting date of the final stage. At this point in time, whichever Member States meet the convergence criteria (decided by qualified majority voting) will move forward to the final stage.

The ecu, single currency of the Union

The Maastricht Treaty stipulates that the irrevocable fixing of exchange rates shall lead to the introduction of a single currency, the ecu. The present basket ecu has already become a major currency on the financial markets and has been stable vis-a-vis the strongest national currencies for a long time. Its stability will increase further in parallel with the achievement of greater convergence in the run-up to Economic and Monetary Union. In order to add institutional strength, the Maastricht Treaty stipulates that the present currency composition of the ecu basket will not be changed. This will enable the present basket ecu to change into the final ecu of Stage Three without any disruption. At the start of Stage Three, the Council of Ministers will adopt the final conversion rates between their currencies and the rates at which the ecu will be substituted for these currencies.

The chosen conversion rate for the ecu will by itself not alter the value of the ecu against individual currencies; in practical terms, this means that the prevailing market rates on the last day of the existence of the basket ecu will be the irrevocably fixed rate of the Stage Three ecu. The ecu will become a currency in its own right. National currencies may still circulate for some while after the start of Stage Three. However, the Maastricht Treaty requires the European Union to adopt the requisite measures for the introduction of the ecu as the single currency rapidly after that date. The ecu of Stage Three will be the currency of those Member States which participate fully in the single monetary policy.