The Economic and Monetary Union

A brief history

In June 1988 the European Council reaffirmed the objective of the 1957 Treaty of Rome establishing the European Economic Community to progressively realize an economic and monetary union. It mandated a committee chaired by Jacques Delors, then President of the European Commission, to draft a concrete programme.

The Delors Report of 17 April 1989 recommended that Economic and Monetary Union be realized in three separate but progressive stages.

• The first stage would focus on completing the single market, reducing differences between the economic policies of member states, removing all the impediments to financial integration and reinforcing monetary cooperation.
• The second stage, which would represent a period of transition before the final stage, would see the creation of the fundamental institutions and organizational structure of EMU and closer economic convergence.
• The third stage would involve the irrevocable fixing of exchange rates and the assignment of full monetary and economic responsibilities to the Community institutions and bodies.

On the basis of the Delors Report's recommendations, in June 1989 the Council decided that the first stage in the creation of Economic and Monetary Union (EMU) would begin on 1 July 1990 with the free movement of capital.

The start dates for the second and third stages were set by the Treaty on European Union signed in Maastricht in 1992. The second stage began on 1 January 1994 with the creation of the European Monetary Institute, with a mandate to strengthen cooperation between central banks and monetary policy coordination in preparation for the institution of a single currency and a single monetary policy.

On 3 May 1998 the European Council decided that eleven of the fifteen member states of the time (Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain) had fulfilled the criteria for economic convergence (sustainable degree of price stability, sound public finances, stable exchange rate, low long-term interest rates) and legal convergence (independence of the national central bank) set by the EC Treaty for membership of EMU and, on 31 December 1998, fixed the irrevocable conversion rates between the euro and their currencies.

On 25 May 1998 the governments of the eleven member states nominated the President, the Vice-President and the other four members of the Executive Board. The appointments took effect on 1 June 1998, marking the establishment of the ECB. The ECB and the member states' NCBs form the Eurosystem, which draws up the single monetary policy in the third stage of EMU. The EMI's mandate came to an end with the establishment of the ECB and the Institute was wound up.

The eleven member states adopted the euro as their single currency with the launch of stage three of EMU on 1 January 1999; on the same date, the conduct of monetary policy was entrusted to the Eurosystem and the European Central Bank.

In the first three years of EMU the euro was a book-entry currency. Cash - euro banknotes and coins - was introduced on 1 January 2002.

Following a check of the EC Treaty convergence criteria, Greece entered the euro area on 1 January 2001, Slovenia on 1 January 2007, Cyprus and Malta on 1 January 2008, Slovakia on 1 January 2009, Estonia on 1 January 2011, Latvia on 1 January 2014, Lithuania on 1 January 2015, Croatia on 1 January 2023.

Enlargement of the European Union

When stage three of Economic and Monetary Union (EMU) began on 1 January 1999, three EU member states (Denmark, Sweden and United Kingdom) decided not to adopt the single currency.

On 1 May 2004, ten new Member States (Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Czech Republic, Slovakia and Slovenia) joined the European Union, followed by Bulgaria and Romania on 1 January 2007. As of 1 July 2013, Croatia is a member of the European Union. Of these countries, the following have joined the euro area to date: Slovenia on 1 January 2007, Cyprus and Malta on 1 January 2008, Slovakia on 1 January 2009, Estonia on 1 January 2011, Latvia on 1 January 2014, Lithuania on 1 January 2015, Croatia on 1 January 2023.

While Denmark and the United Kingdom have a special status under the relevant protocols annexed to the Treaty giving them the right to participate in the euro at a later date, all the others states have the status of member state with a derogation (see Article 122 of the EC Treaty).

EU membership means that the NCBs of the new member states become part of the ESCB and their governors become full members of the General Council. Experts from these NCBs have full-member status in the meetings of the ESCB committees whenever they deal with matters within the competence of the General Council.

In order to join the euro area, an EU member state must demonstrate that it has met the convergence criteria laid down in the EC Treaty.

Convergence criteria

The convergence criteria used to establish whether a country is eligible to join EMU were laid down in Article 121(1) of the EC Treaty and subsequently expanded in Protocol 21 annexed to the EC Treaty. The ECB later defined the way in which it applies the criteria.

The definitions include:
a) 

The criteria include:

• price stability: in the twelve months preceding the assessment, the average inflation rate must not exceed by more than 1.5% the average rate of the three member states with the lowest inflation rates
• sustainability of public finances: the government deficit must not exceed 3% of GDP and the government debt must not exceed 60% of GDP, unless they are declining substantially and continuously
• exchange rate stability: the exchange rate of the respective currency must respect, for at least two years, the normal fluctuation margins provided for by ERM II without devaluing against the currency of any other member state
• convergence of long-term interest rates: the average nominal long-term interest rate (on government bonds or comparable securities) observed over the year preceding the examination must not exceed by more than 2 percentage points the average rate of the three member states with the lowest inflation rates.