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
§ 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.
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
§ 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
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