The Euro was officially started in 1999 in the first eleven countries. In the beginning, the Euro was employed for transaction purposes while the banknotes and coins came into life in 2002. There are five Maastricht Convergence criteria that are used in the consideration of membership. European countries wishing to join have to meet them. First is the price stability that says that the nation’s inflation rate shall not be more than 1.5 percent above the levels of the best three performing member nations. The second condition was the durability of convergence. The criterion identifies with the factor of the long-term interest rate, and it shall not be more than 2 percent in excess of the level of the best three acting member countries. It is done with the price stability as the basis (Von Hagen, p 135).
The public finances are measured as a percentage of the total debt the country’s administration owes relative to the GDP. The debt need not to surpass 60 percent of the country’s GDP. Stability of the exchange rate also comes into sharp focus. A country’s exchange rate must be devaluated or redesigned within two years preceding entry into EMU. Many states meet or are typically close to meeting the inflation and interest levels criteria. Nevertheless, in most cases, huge decreases in budget deficits are essential for meeting the criteria. Countries may not be ready to adopt the restrictive financial and fiscal strategies necessary to guarantee its membership.
Another critical aspect is that the cost of involving oneself in the Exchange Rate Mechanism just before joining EMU is not favorable. It is not adequate for the countries because fiscal policy cannot be used as a factor in stabilizing output shocks. Nations may not join the EMU when the needed insufficiency decrease is relatively massive. They are not likely to participate when inflationary prospects are much stubborn and when the inconsistency of output tremors is high. Also, joining EMU becomes unlikely when political cost in participation is low. The countries can participate if the inflationary prejudice to financial procedures is comparatively large.
In Europe, many governments chart a policy restriction where the decision to participate in EMU is dependent on the outcomes of the yield shocks. A hefty enough undesirable output shock plus the associated recession could cause strategy to be removed from the restrictive posture essential to meet the convergence criteria to steadying the shock (Eijffinger, p 11). In a nutshell, negative shocks upsurge anxiety about a policy shift instigating interest rates to rise. It points out to the fact that the interest rates rises witnessed while ERM catastrophes could reproduce output shocks rather than unpredictability in the ERM.
Furthermore, the required data of the countries that cover these aspects are not accessible. Therefore, monitoring and evaluating a state that seeks to join becomes quite difficult as it triggers economic certainties of member states. It is expensive for most countries to meet the budget deficit criteria. Budget shortfalls are normally big in most countries. In Denmark, France, Ireland and the Netherlands, reasons other than the budget deficits are advantageous. On the other hand, budget deficits for Italy and Spain are not encouraging.
The criterion was thought necessary to make the union stable. The fiscal measures are envisioned to increase in spillovers from unwarranted budget shortages in one nation that under the EMU could upsurge interest tolls for other nations. EMU could surge these spillovers by aggravating political market letdowns that root countries to run extreme budget arrears. Market devices that aid to limit growths in budget deficits by floating the cost of debt issuance might not be as operative under the EMU. There are two reasons for these. Firstly, since realms can no longer use increases to reduce the actual value of the obligation, there would be no country-particular inflation jeopardy premium.
Secondly, any propensity for the default peril premium to increase is likely to be restricted by the insight that the systematic risk to the monetary system would create a bail-out needed in the event of a non-payment. Such a non-payment would advance inflation rates or tax loads throughout the monetary union conditional on how it is funded. In distinction to the concern about undesirable externalities that motivate the two fiscal criteria, the resolve of the inflation and interest degree standards is to protect the nominal conjunction obligatory for the smooth changeover into membership. Most states already chance or are close to ensuring an inflation and interest rate union measures. No country typically meets the management debt or budget scarcity criteria concurrently.
Unfortunately, the financial crises, bankruptcy of nations and dangerous government deficits occurred in the last few years. Greece economic and financial predicament began speculations about countries like Italy, Portugal and Spain economic stability. The criterion is necessary because any fluctuations in currency matters affect markets in the entire globe especially in big economies like the United States. Most countries find it easier to meet the price stability criteria.
The Stability and Growth Pact (SGP) was meant to flesh out the strategies and policies that are provided in the Maastricht treaty. It was adopted in 1992 to reinforce the fiscal policies desired by the EMU. The pact has two ways of dealing with this and ensuring the policies work. There is the preventive section that entirely focuses on multilateral surveillance and the prevention of extreme deficits. There also exists another division that is designed to address gross strategy missteps. The section is known as the dissuasive arm. The SGP was introduced in 1998 and subsequently revised in 2005.
The preventive arm acts in maintaining a sound and amicable fiscal policy. It ensures that countries complement the three percent of Gross Domestic Product deficit ceiling by needing states to struggle for a medium- term objective (MTO). In the beginning, states were urged to ensure a joint surplus stance. The surplus was interpreted as an insufficiency no bigger than half a percent of GDP over the period. The idea was to provide an adequate cyclical safety margin to allow complete operation of automatic stabilizers in case of times of economic downturns. All these must not breach the three percent initial value.
Later in 2005, states were then allowed powers to create their own MTO’s. The policy however had to be based on factors that inspire sustainability within specific limitations that include the one percent of GDP deficit. States that have not yet achieved this are required to target a modification of half a percent of GDP in a year and other immediate plans of action. The countries are given an allowance of deviating from their MTO’s for undertaking structural measures of reform. The states are needed to hand in yearly stability programs. Once these returns are filed, the council comprising of finance ministers from the countries offer an opinion. When the council realizes that the three percent limit may be breached, then they issue a warning.
The dissuasive arm is also known as the Excessive Deficit Procedure (EDP). The division is tasked with ensuring that the member states adhere to the limits on deficits. The limit is at three percent of the GDP a debt, which is normally 60 percent of the GDP as enshrined in the Maastricht Treaty. In case there are sufficient facts that point to a country having excessive deficit, they will be advised to institute immediate corrective measures within a particular timeline (Grieco, p 31). The countries that do not seem to comply are subjected to strict surveillance. The increased surveillance may at times lead to the imposition of stringent monetary penalties. One desire of the SGP was to hasten the steps necessary to being a member as the states seek to comply and allow authorizations to be visited upon countries in ten months.
The reform measures taken in 2005 allowed flexibility levels in meeting the conditions. These were the untying of the clauses that governed escape, stretching of timelines required in taking action. Also, there was the growing of the situations under which lengthier adjustment durations are allowed. The shift of focus to measures instituted rather than the outcomes proved integral. Countries are currently needed to ensure a benchmark minimum regulation of half a percent of GDP, action plans that are provisional and net of one-offs. Enforcement of these policies has not been easy. Many states, including the strongest members did not chart the path that sought them to ensure necessary monetary equilibrium in the specific cycles. Most nations were not even successful in ensuring the deficits were less than the critical three percent of GDP standards. Enacting of procedures was also weak (Wyplosz, p 210). These weaknesses are what must be addressed to secure the future of the Monetary Union.
With the recent global financial crisis, the future of the EMU is important for the financial stability of Europe. The euro area sovereign catastrophe visited a huge impact on the economy of Europe and its macro-financial stability. The crises have led to the reevaluation of the macroeconomic forces that affect the stability of countries. It has also necessitated a rethink of the EMU architecture. Agreements abound as to what might have caused the crisis and how it can be handled to secure the future. First, both markets and policy designers were not well aware of the financial stability dangers posed by the escalating international system of banking. Secondly, the Euro area problems are possible as a result of the build-up of broader macroeconomic disproportions, home values and the developments in credit. There were also policy mistakes that were made by member countries before the crisis began. Some countries even followed imprudent paths of financial strategy. Enforcement of the SGP procedures also contributed significantly to the crisis.
The EMU, therefore, needs changes if it is to act prudently in securing the financial stability of Europe. One of the institutional changes that the countries are in agreement is the creation of a complete and all-inclusive banking union. The banking union will follow the path of the Commissions blueprint persuasions made in November 2012. However, the confines of monetary integration in the euro area remain unsolved (Von Hagen, p 137). Determined proposals for monetary facilities connecting not only capital gaps for lenders and sovereigns, but also leveling out unequal ultimatum shocks, contrary to more negligible tactics to fiscal amalgamation that accentuate the negative inducement impacts of more far-reaching considerations.
Therefore, a stable monetary union requires ultimate cooperation from all members of the union. Trust in the relations with countries that trade in their monies must be upheld if such a crisis is to be evaded. The future of the union is bright especially if the shortfalls that led to the previous financial debacle are noted and prevent. The desired relationship between commercial markets and public institutions will determine how stringent and activist euro area policy coordination and financial assistance will need to be. Power may shift between the central EU institutions and member states in either direction. Of importance for the EMU though is stability of the economy in the future.
Works Cited
Eijffinger, Sylvester, and Jakob de Haan. "European monetary and fiscal policy." OUP Catalogue (2000).
Grieco, Joseph M. "The Maastricht Treaty, Economic and Monetary Union and the neo-realist research programme." Review of International studies 21.01 (1995): 21-40.
Von Hagen, Jürgen, and Barry Eichengreen. "Federalism, fiscal restraints, and European monetary union." The American Economic Review (1996): 134-138.
Wyplosz, Charles. "European Monetary Union: the dark sides of a major success." Economic Policy 21.46 (2006): 207-261.
