Eurozone

The European Economic and Monetary Union

The decision to form an Economic and Monetary Union was taken by the European Council in December 1991, and was given legislative effect by the Maastricht Treaty of 1992.
Its principal features are:

- the adoption of single currency by all of its members;

- the coordination of its members' fiscal policies, by the adoption of agreed limits on the magnitudes of their public debt and their budget deficits; and,

- the operation of a common monetary policy under the management of a single Central Bank.

Its principal institutions are:

- the European Council, which sets its main policy directions;

- the Council of the European Union which coordinates its policy and decides whether to admit new members;

- the European Commission, which monitors compliance with its membership rules; and,

- the European Central Bank, which determines its monetary policy.

Membership

The Maastricht criteria

The criteria for eurozone membership set out in the Maastricht Treaty were

• An inflation rate not exceeding by more than 1.5% that of the three best-performing Member States in terms

of price stability.

• A general government deficit not exceeding 3% of GDP: an indication of sound public finances.
• Public debt of less than 60% of GDP or sufficiently diminishing and approaching this value at a satisfactory

pace: a measure of the longer-term sustainability of public finances.

• A long-term interest rate not exceeding by more than 2% that of the three best-performing Member States in

terms of price stability: an indicator of durability and credibility.

• A stable exchange rate, demonstrated by participation without severe tension in the exchange rate

mechanism known as ERM-II and by keeping the exchange rate close to the central rate for two years prior to adoption of the euro. This measures the robustness of the economy and the stability of real convergence by showing that the government can manage the economy without resorting to currency depreciation.

The Stability and Growth Pact

The Stability and Growth Pact that was introduced as part of the Maastricht Treaty in 1992, set arbitrary limits upon member countries' budget deficits and levels of national debt at 3 per cent and 60 per cent of gdp respectively. Following multiple breaches of those limits, the pact has since been renegotiated to introduce the flexibility necessary to take account of changing economic conditions. Revisions introduced in 2005 relaxed the pact's enforcement procedures by introducing "medium-term budgetary objectives" that are differentiated across countries and can be revised when a major structural reform is implemented; and by providing for abrogation of the procedures during periods of low or negative economic growth . A clarification of the concepts and methods of calculation involved was issued by the European Union's The Economic and Financial Affairs Council in November 2009 which includes an explanation of its excessive deficit procedure.