ustice and Home Affairs. Most importantly, for the purposes of this analysis, the EU established a timetable which is to lead to economic and monetary union by 1999. The aim is to introduce a single currency (the Euro), a common monetary policy and an economic policy closely coordinated among member states. The European Central Bank, to be based in Frankfurt, will control the money supply and interest and exchange rates (Lindley, 1996).
Under the Maastricht treaty, a transition period to EMU--Stage II--began in January of 1994. This was intended to lead to the third stage--full monetary union with a European Central Bank and a single currency in 1999.
The treaty also calls on the member states to strive to meet stringent "convergent economic criteria" in order to be ready for monetary union. The criteria include a budget deficit under three percent of Gross Domestic Product in 1997; an inflation rate that does not exceed 1.5 percentage points of the average of the three Member states with the lowest inflation rates; long-term interest rates no more than two percentage points above the average of the three Member States with the lowest interest rates; and an exchange rate that has stayed within the "normal" fluctuation bands in the Exchange Rate Mechanism (ERM) for the most recent two years (Kicking and screaming, 1997).Between 1994 and early 1997 some progress as well as some setbacks have occurred as the member states attempted to meet the guidelines for the four economic criteria. Some positive steps have been taken over the past few years on inflation convergence. For example, in Italy, once notorious for its inflation, there has been significant stabilization (Andrews, 1997).
In its annual report for 1996, however, the European Monetary Union stated the most European countries had failed to control their budget deficits sufficiently to launch the Euro in 1999. On average, the deficit-to-GDP ratio hit an estimated 4....