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6.4 European Monetary Union
6.4a Maastricht Treaty
In December 1991, the meeting in Maastricht was
held which secured an agreement on a treaty framework of the European
Union. Besides this, political and monetary unions with a timetable
chart for implementation was also included. The Member States also
agreed upon a new system of police and military co-operation. In
December 1992, the 12 nations compromised at the Edinburgh Summit.
They rectified the treaty and agreed to establish a single currency
by 1999. This would be administered by a single Central Bank. The
Central Bank intervention is required to keep the currency within
the band. A currency is permitted to float within a 2¼ percent band
on either side of the par rate between the state currency and any
other member currency.
6.4b The Formation of the European Monetary Union
Under the terms of the treaty of Maastricht, it was approved that there be a monetary and economic union of European countries. The European countries committed to co-ordinate their economic policies, monitor their fiscal policies to prevent excessive deficits. Besides this they have also planned to introduce a common currency.
In 1990, the internal market of EMU was created. Freedom to
move the capital throughout the European Union was recently achieved.
In 1994, in Frankfurt, the Economic Monetary Institute (EMI) is
making all technical preparations and arrangements required to introduce
one currency. The European system of Central Banks is also to be
established.
The admission to the EMU is on the basis of the Exchange Rate Mechanism (ERM) i.e. keeping the money fluctuating within narrow bands. It was decided that only those with similar inflation and mutual exchange rates were stable on a large scale. They would be allowed to join the EMU. Presently most of the member nations meet this monetary condition. Countries are converging on low rates of inflation and the differences between their long-term interest rates are small. The result of this is that the currencies still in ERM are fluctuating with a narrow margin: they are currently moving with a range of 2-2 ½% even though movements of up to 15% are permitted by the system’s rules. These are achieved without any big interest rate differentials. They also must show a large measure of confidence on the part of financial markets that a substantial number of member states will go ahead with this scheme of monetary union.
Within a short span of time, it was assumed that all European Union States would meet the membership criteria. However, it is not very easy to predict as to how many more countries would fulfill the membership requirements of the EMU. It appears that the EMU will start from 1999 consisting of 6 to 8 member states. Countries like Britain and Denmark are not able to join this union, as Britain is reluctant to compromise on her sovereignty and Denmark has to fulfill the conditions included in the treaty of Maastricht.
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