The Maastricht Treaty
In December 1991, the members of the EU met at Maastricht, the Netherlands, and concluded a treaty that changed Europe’s currency future.
Timetable.The Maastricht Treaty specified a timetable and a plan to replace all individual ECU currencies with a single currency called the euro.Other steps were adopted that would lead to a full European Economic and Monetary Union (EMU).
Convergence Criteria.To prepare for the EMU, the Maastricht Treaty called for the integration and coordination of the member countries’ monetary and fiscal policies.The EMU would be implemented by a process called convergence.Before becoming a full member of the EMU, each member country was originally expected to meet the following convergence criteria:
● Nominal inflation should be no more than 1.5% above the average for the three members of the EU with the lowest inflation rates during the previous year.
● Long-term interest rates should be no more than 2% above the average for the three members with the lowest interest rates.
● The fiscal deficit should be no more than 3% of gross domestic product.
● Government debt should be no more than 60% of gross domestic product.
The convergence criteria were so tough that few, if any, of the members could satisfy them at that time, but 11 countries managed to do so just prior to 1999.Greece adopted the euro on January 1, 2001.
Strong Central Bank.A strong central bank, called the European Central Bank (ECB), has been established in Frankfurt, Germany, in accordance with the Treaty.The bank is modeled after the US Federal Reserve System.This independent central bank dominates the countries’ central banks, which continue to regulate banks resident within their borders; all financial market intervention and the issuance of euros remain the sole responsibility of the ECB.The single most important mandate of the ECB is to promote price stability within the European Union.
As part of its development of cross-border monetary policy, the ECB has formed the Transeuropean Automated Real-time Gross Settlement Express Transfer System (TARGET).TARGET is the mechanism by which the ECB will settle all cross-border payments in the conduct of EU banking business and regulation.It will allow the ECB to conduct monetary policy and other intrabanking system capital movements quickly and without cost.