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 the euro as its members' the single currency;

- 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.

Rationale

The adoption of a common currency as part of the Economic and Monetary Union was seen as lowering the barriers to Europe's markets by reducing transaction costs and eliminating exchange rate risks. It was generally accepted that there could be offsetting disadvantages arising from loss of control over their domestic economies, but most of the continent's governments judged the balance to be positive. Some have since come to question that judgement because of the unsymmetrical impact of recent demand shocks upon the domestic economies of member countries.

Membership

Entry 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;

- a general government budget deficit not exceeding 3% of GDP and a public debt of less than 60% of GDP;

- a long-term interest rate not exceeding by more than 2% that of the three best-performing Member States; and,

- a stable exchange rate.

Membership rules

The original version of the membership rules in the Mastricht Treaty (The Stability and Growth Pact , ) set the same limits upon member countries' budget deficits and levels of national debt. Following multiple breaches of those limits by several member countries including Germany and France the pact was been renegotiated.

The revised agreement treats a budget deficit not greater than 3 per cent of GDP, and a public debt not greater than 60 per cent of GDP as targets rather than permitted limits, and provides for:

- a "medium term budgetary objective" for each member country that specifies margins within which the target values may be exceeded;

- an adjustment path for return to the target levels;

- procedures for determining and revising the country's budgetary objectives and adjustment paths: and,

- an "excessive deficit procedure", prescribing the actions required of a country whose deficit is deemed to be excessive.