THE EUROPEAN UNION:
MOVING TO THE FINAL STAGE OF THE ECONOMIC AND MONETARY UNION
By:
Stefan John
New York
The Delors committee report of 1989 proposed a three-stage process for the movement to full economic and monetary union (EMU). This structure was effectively accepted at the Madrid European Council in June 1989 when it was decided that the first stage of EMU should begin in June 1990. As envisaged by the Delors committee, the first stage of EMU was comprised of a number of elements, including:
new procedures to promote co-ordination of economic and monetary policies;
all the EC currencies coming within the exchange rate mechanism (ERM) of the European Monetary System (EMS); and
a new mandate for the Committee of Central Bank Governors to enable them to formulate (non-binding) opinions on the direction of economic and monetary policy, foreign exchange policy and banking supervision.
By the end of stage one in December 1993, the necessary pre-conditions for a workable EMU were successfully put into place. Stage two, which is the current stage, began on January 1, 1994 and is geared toward the establishment of a common institutional structure. Among the most important measures during this stage are:
the European Monetary Institute (EMI) has been established as predecessor to the European Central Bank, which is to be established in stage three of EMU;
in accordance with Article 107 of the EC treaty, the central banks of all member states (except the UK and Greece) are independent, at least de jure; and
the member states are to endeavor to avoid excessive government deficits and are no longer allowed to have deficits financed by their central banks.
While the entering into of stages one and two of EMU went smoothly and was barely noticed by the public, the move to the third and final stage is encountering widespread criticism and concern. Part of the reason for this reaction seems to be that this move is considered irrevocable. The third stage is, indeed, intended to complete the EMU by the irrevocable fixing of exchange rates and the eventual move (around the year 2002) to a single currency (now designated as the euro). The date for the start of the third stage has been set for January 1, 1999. In these circumstances, the European Council must decide, by qualified majority before July 1, 1998, which of the member states meet the requirements for full EMU. The decision will be based upon reports of the EMI and the European Commission to the Council on whether the member states have achieved a high degree of sustainable convergence by reference to four criteria:
price stability;
budget stability;
exchange rate stability; and
long-term interest rate stability.
These criteria are set out in Article 109J(1) of the EC treaty and are elaborated in a protocol thereto. The states meeting the criteria move on to full EMU. The states not doing so will have the status of so-called members with derogation which entails the consequences specified in Article 109K(3) and results mainly in the respective member's exclusion from rights and obligations within the European System of Central Banks (ECBS). In full EMU, the ESCB -- composed of the ECB and the central banks of the member states -- will replace the EMI. Only the ECB and the national central banks may issue bank notes within the EC and only such notes shall have the status of legal tender. The basic tasks of the ESCB will be to define and implement, in accordance with the principles of an open market economy with free competition, the monetary policy of the EC, to conduct foreign exchange operations, to hold and manage the official foreign reserves of the member states and promote the smooth operation of payment systems. All these activities of the ESCB shall be driven by its primary objective, namely, to maintain price stability. The ECB, which is to have legal personality (Article 106(2) of the EC treaty), will have two decision-making bodies, the Governing Council and the Executive Board. These two bodies will also govern the ESCB. The acts and omissions of the ECB are to be subject to review by the European Court of Justice under the same conditions that apply to other Community institutions.
