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countries' inflation rates by more than 1.5%,
long term interest rates on government bonds
cannot exceed the average long term rate of the
three countries with the lowest inflation rate by
more than 2%, the government deficit must be
equal to or less than 3% of GDP, and the total
government debt cannot exceed 60% of GDP.
If the European Council decides in 1997
that a majority of the EC members meets the
above criteria, the EMI will become the ECB.
If a majority of the countries fails to meet the
criteria, the ECB will start operating in 1999
with those member countries that do meet the
criteria. The EC member countries that fail to
join the EMU will not be allowed to participate
in the voting on EMU monetary policy.
The gains from EMU are primarily
political rather than economic. Monetary union
and a single currency would benefit the
integration of the individual countries into a
common Europe. The Commission of the
European Communities estimates the economic
gains of EMU at around 10% of the EC real
GNP. However, Dr. Martin Feldstein of
Harvard University argues that a common
currency could lead to a reduction in intra-
European trade, higher unemployment rates and
more severe business cycles within individual
countries. Gains from free trade are based on
the principle of comparative advantage.
Usually, domestic monetary policies can be
utilized to counter international demand
fluctuations in the goods a country specializes
in. Within the EMU this policy tool will no
longer be available to the individual countries.
2. Common Foreign and Security Policy
Common foreign and security policies
are going to be formulated by the foreign
ministers of the member countries. The
individual governments will have to adhere to
the common policies set by the foreign
ministers. One of the goals of the common
foreign and security policy is the formulation of
a common defense policy to create a common
defense. Nine EC member countries are
already members of a defense pact called
Western European Union (WEU). The WEU
is going to represent Europe within the Atlantic
alliance.
3. Common Justice and Home Affairs
Policies
A new committee will be created that
will work on the formulation of common
customs, immigration, asylum, drugs, terrorism
and crime policies. Justice and home affairs
policies will be voted upon by the interior
ministers of the member countries.
In addition, the Maastricht Accord
contains a social protocol, which was accepted
by all member countries except for Britain.
The members of the social protocol will make
common laws concerning social security, equal
employment opportunities, and working
conditions.
The Maastricht Accord also allows the
Council of Ministers (Heads of States of the
member countries) to vote on common laws in
consumer protection, transport, and
environmental law with a qualified majority
instead of the formerly required unanimous
vote. Common European policies to promote
small business, exploitation of innovations, and
assistance to industries that undergo structural
changes have to be adopted by a unanimous
vote.
The Maastricht Accord has to be
ratified by the governments of the member
countries. The Accord was ratified in France
by referendum last year, but the citizens of
Denmark rejected the Accord. Negotiations are
currently taking place, so that the citizens of
Denmark will vote again on the Accord.
Britain intends to ratify the Accord after
Denmark accepted it. The German government
ratified the Accord, with a referendum to be
held in the future.
* Joachim Knop is a Research Associate with the Bureau of
Business and Government Research.
Bibliography
1. Michele Fratianni, Jiurgen von Hagen and Christopher
waller, "The Maastricht way to EMU", Essays in
International Finance, No. 187, June 1992, Princeton
University.
2. "Maastricht at a glance", The Economist, October 17,
1992, pp.60 - 61.
3. Dr. Martin Feldstein, "Europe's Monetary Union - The
Case against EMU", The Economist, June 13, 1992,
pp. 19 - 22.
4. Michael J. Chriszt, "European Monetary Union: How
Close Is It?", Economic Review, Federal Reserve Bank
of Atlanta, Sep/Oct 1991, pp. 21 - 27.
