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Economic and Monetary Union (EMU) Economic and monetary union (EMU) is the process of harmonising the economic and monetary policies of the Member States of the Union with a view to the introduction of a single currency, the euro. It was the subject of an Intergovernmental Conference (IGC), which concluded its deliberations in Maastricht in December 1991. EMU was achieved in three stages: § First stage (1 July 1990 to 31 December 1993): free movement of capital between Member States, closer coordination of economic policies and closer cooperation between central banks. § Second stage (1 January 1994 to 31 December 1998): convergence of the economic and monetary policies of the Member States (to ensure stability of prices and sound public finances) and the establishment of the European Monetary Institute (EMI) and, in 1998, of the European Central Bank (ECB). § Third stage (from 1 January 1999): irrevocable fixing of exchange rates and introduction of the single currency on the foreign-exchange markets and for electronic payments. Introduction of euro notes and coins. When the third stage of EMU was launched, eleven Member States adopted the euro as the single currency. They were joined two years later by Greece. Slovenia entered the euro zone on 1 January 2007. Three Member States did not adopt the single currency: the United Kingdom and Denmark, both of which have an opt-out clause, and Sweden, following a referendum in September 2003. The States which joined the Union on 1 May 2004 and 1 January 2007 are required to adopt the euro as soon as they meet all the convergence criteria. They were not granted opt-out clauses during the accession negotiations. The challenges facing the long-term success of EMU are continued budgetary consolidation and closer coordination of Member States' economic policies. Convergence criteria In order to ensure the sustainable convergence required for the achievement of economic and monetary union (EMU), the Treaty sets four convergence criteria which must be met by each Member State before it can take part in the third stage of EMU and hence before it can adopt the euro. Compliance is checked on the basis of reports produced by the Commission and the European Central Bank (ECB). The criteria are: § the ratio of government deficit to gross domestic product must not exceed 3% and the ratio of government debt to gross domestic product must not exceed 60%; § there must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination, which does not exceed by more than one and a half percentage points that of the three best performing Member States in terms of price stability; § there must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing Member States in terms of price stability; § the normal fluctuation margins provided for by the exchange-rate mechanism must be respected without severe tensions for at least the last two years before the examination. The convergence criteria are meant to ensure that economic development within EMU is balanced and does not give rise to any tensions between the Member States. The criteria relating to government deficit and government debt must continue to be met after the start of the third stage of EMU (1 January 1999). To this end, a stability pact was adopted at the Amsterdam European Council in June 1997 and enables the members of the Euro-zone to coordinate national government budget policies and avoid excessive government budget deficits. Stability and Growth Pact The Stability and Growth Pact (SGP) pertains to the third stage of economic and monetary union (EMU), which began on 1 January 1999. It is intended to ensure that the Member States maintain budgetary discipline after the single currency has been introduced. In formal terms, the Pact comprises a European Council resolution (adopted at Amsterdam on 17 June 1997) and two Council Regulations of 7 July 1997 laying down detailed technical arrangements (one on the surveillance of budgetary positions and the coordination of economic policies and the other on implementing the excessive deficit procedure). Following discussions on operation of the SGP, the two regulations were amended in June 2005. In the medium term, the Member States undertook to pursue the goal of a balanced or nearly balanced budget and to provide the Council and Commission with a stability programme by 1 March 1999 (and update it annually thereafter). Similarly, States not taking part in the third stage of EMU, i.e. those that have not (yet) introduced the euro, are required to submit a convergence programme. The Stability and Growth Pact opens the way for the Council to penalise any participating Member State that fails to take appropriate measures to end an excessive deficit (the "excessive deficit procedure"). Initially, the penalty would take the form of a non-interest-bearing deposit with the Community, but it could be converted into a fine if the excessive deficit is not corrected within two years. However, there is no fixed rule concerning these penalties: they are subject to assessment of the circumstances by the Council. |