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Europe and the Maastricht challenge
The uncertainty caused by the exchange rate crises of 1992-93 led to two questions: Is monetary union still feasible? What strategies are best for achieving convergence according to the Maastricht criteria? This article addresses these questions by examining the progress made by the five major European Union countries in satisfying the Maastricht criteria and the two crucial impediments facing these countries--disparities in real exchange rate convergence and fiscal imbalances--and alternative strategies to deal with these impediments. Overall, our analysis suggests that the prospects for monetary union are less gloomy than many analysts believe. We show that wide bands have been useful in limiting competitive disparities. We also argue for more general fiscal criteria set forth in the Maastricht treaty. Under these more general criteria, countries that reversed the path of debt accumulation and achieved a sustainable deficit would be admitted to the monetary union. Finally, under a multispeed transition, a small group of countries will form the initial core of the monetary union, and other countries will join over time.
AUTHORS: Aglietta, Michel; Uctum, Merih
The transition to E.M.U.: structural and strategic aspects
The recurrent crises in the EMS have bolstered a lively debate about the transition to EMU. Indeed the political economy of regional integration is at odds with the theory of optimum currency areas. Essentially static and based on real criteria alone, the latter is not suited to deal with a process which has historical roots, political ends, real and nominal dimensions. The relevant concept is convergence. ; Part I first discusses the interplay of nominal and real convergence, then examines the structural and behavioural asymmetries between European countries. It shows why convergence is not the outcome of spontaneous market mechanisms. Resting on deep-rooted asymmetries, market forces interfere with ill-conceived policies to induce a divorce between nominal and real convergence. Three types of asymmetries, which raise concern for the transition to EMU, are highlighted: the conditions of competitiveness, the disparities in the transmission of monetary policies, the difficulties of fiscal consolidation. ; Part II draws lessons from the structural analysis which enables us to define the principles and the operational procedures of a workable transition. Three principles are emphasized: self-selection of countries respective to EMU membership according to their own convergence paths; achievement of the highest stability of exchange rates compatible with the progress of real convergence; compliance with the institutional procedures written down in the Treaty. These principles have strong operational consequences: the emergence of a hard core working as a stable center to guarantee the coherence of multiple transitions; the set-up of a two-tier exchange rate arrangement within the wide bands; the strengthening of financial solidarity and monetary co-responsibility within the hard core.
AUTHORS: Aglietta, Michel
Fiscal consolidation in Europe
The Maastricht Treaty imposes constraints on fiscal policy that will last beyond the formation of EMU. However, the fiscal requirements are determined in an ad hoc way, and do not consider the position of the countries in the business cycle, nor the medium-term planning horizons of the governments. In this paper, we revisit the concept of "sustainability" of deficits announced in the treaty. After discussing the cyclical and the structural aspects of total deficits that occurred until 1994, we use an intertemporal, forward-looking approach to evaluate the fiscal stands of the countries under several scenarios until 2000. The advantage of our framework over the Maastricht fiscal criteria is that it provides different options for countries to follow for membership in EMU, while taking into account the effect of the cycles on the deficit and debt accumulation. Our analysis shows that if countries follow the sustainability rule, they have to pursue tight fiscal policies until 2000 in order to qualify for membership in EMU. If the fiscal restraints start in 1995, all countries become eligible. Otherwise, our analysis provides explicit measures each country needs to apply to have a sustainable deficit.
AUTHORS: Aglietta, Michel; Uctum, Merih