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7.2.3.  The stages of EMU

    As the date set for the completion of the internal market was approaching [see section 6.1] it became clear that the full benefits of the single market would be difficult to achieve with the relatively high business costs created by the existence of several currencies and unstable exchange rates. Therefore, in June 1988, the European Council meeting in Hanover, Germany, set up a Committee for the Study of Economic and Monetary Union, chaired by the then President of the Commission, Jacques Delors, and including all EC central bank governors and three personalities designated by common agreement of the Heads of State or Government. The unanimous report of the committee, submitted in April 1989, defined the monetary union objectives as a complete liberalisation of capital movements, full integration of financial markets, irreversible convertibility of currencies, irrevocable fixing of exchange rates, and the possible replacement of national currencies by a single currency. The report indicated that these objectives could be achieved in three stages, moving from closer economic and monetary coordination to a single currency with an independent European Central Bank and rules to govern the size and financing of national budget deficits.

    The Treaty establishing the European Community, signed at Maastricht in 1991, provided for the introduction of a single monetary policy based upon a single currency managed by a single and independent central bank. According to the Treaty, the primary objective of the single monetary policy and exchange rate policy should be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition. These activities of the Member States and the Community should entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments (Article 119 TFEU, ex Article 4 TEC).

    The 1971 experience served the EU to prepare successfully the changeover to the single currency. Although economic and monetary union was envisaged as a single process, there were, in fact, three stages involved. The first stage, marking the beginning of the whole process, came with the entry into force of the Directive on the complete liberalisation of capital movements in July 1990 [see section 6.7]. The central objectives of this stage were greater convergence of economic policies and closer cooperation between central banks, incorporating greater consistency between monetary practices in the framework of the European Monetary System [Decision 64/300].

    As provided for in Article 118 of the EC Treaty, the composition of the basket of the ecu was "frozen" on 1 November 1993, the date of the entry into force of the Maastricht Treaty, on the basis of the composition of the basket (in amounts of each national currency) defined on 21st September 1989 at the occasion of the entry into the basket of the peseta and the escudo. The European Council, meeting in Madrid on 15 and 16 December 1995, decided that, as of the start of stage three, the name given to the European currency should be the euro, a name that symbolises Europe and should be the same in all the official languages of the European Union, taking into account the existence of different alphabets, i.e. the Latin and the Greek.

    The second stage of economic and monetary union began on 1st January 1994 and ended on 31 December 1998. During that stage, the Treaty on the European Community compelled each Member State to endeavour to avoid excessive public deficits and initiate steps leading to independence of its central bank, so that the future monetary union encompassed only countries which were well managed economically. A Council Regulation laid down detailed rules and definitions for the application of the excessive deficit procedure (EDP), including the definition of public debt, as well as rules for the reporting of data by the Member States to the Commission, which fulfils the role of statistical authority in the context of the EDP [Regulation 479/2009, last amended by Regulation 220/2014]. In the process leading to the independence of central banks, the Treaty prohibited them from granting governments overdraft facilities or any other type of credit facility and from purchasing public sector debt instruments directly from them (Article 123 TFEU, ex Article 101 TEC). Regulation 3605/93 codified by Regulation 479/2009 clarified certain implications of this prohibition.

    Together with the prohibition on the direct monetary financing of public deficits and in order to submit public borrowings to market discipline, the Treaty provided that public authorities should not have privileged access to financial institutions, unless this was based on prudential considerations (Article 124 TFEU, ex Article 102 TEC). The Treaty sought, thus, to institutionalise a sort of market-induced budgetary control. To this effect, Regulation 3604/93 defined the terms "privileged access", "financial institutions", "prudential considerations" and "public undertakings".

    In preparation for the move to the third stage, the Treaty required a high degree of convergence assessed by reference to four specific criteria [see also section 7.3.1]: (a) a rate of inflation which is close to that of the three best performing Member States in terms of price stability; (b) a government budgetary position without a deficit that is excessive, meaning a government deficit not exceeding 3% of GNP and total government debt not greater than 60% of GNP (subject to an appraisement by the Council deciding by qualified majority); (c) the durability of convergence achieved by the Member State being reflected in the long-term interest rate levels; and (d) the observance of the normal fluctuation margins provided for by the Exchange Rate Mechanism of the European Monetary System for at least two years (Article 140 TFEU, ex Article 121 TEC and Protocol on the excessive deficit procedure).

    Following the procedure and the timetable set out in the EC Treaty, the Council meeting at the level of Heads of State or Government on 3 May 1998, decided that 11 Member States satisfied the necessary conditions for the adoption of the single currency on 1 January 1999: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. In July 2000, the Council agreed that Greece also fulfilled the convergence criteria and could therefore adopt the single currency. The Council had previously stated that Sweden did not at that stage fulfil the necessary conditions for the adoption of the single currency, because it did not participate in the mechanism of the European Monetary System. It did not examine whether the United Kingdom and Denmark fulfilled the conditions, because, in accordance with the relevant Treaty provisions, the United Kingdom notified the Council that it did not intend to move to the third stage of EMU on 1 January 1999 and Denmark notified the Council that it would not participate in the third stage of EMU. Member States benefiting from an "opt-out" and those which do not meet the criteria from the outset participate nevertheless in all the procedures (multilateral surveillance, excessive deficit...) designed to facilitate their future participation. The Governors of their central banks are members of the ECB General Council [see section 4.2.1]. Slovenia adopted the single currency on 1 January 2007 [Decision 2006/495], Cyprus and Malta on 1 January 2008 [Decisions 2007/503 and 2007/504], Slovakia on 1 January 2009 [Decision 2008/608 and Regulation 693/2008], Estonia on 1 January 2011 [Decision 2010/416 and Regulation 670/2010]. Latvia adopted the euro on 1 January 2014 [Decision 2013/387 and Regulation 678/2013], Latvia on 1 January 2014 [Decision 2013/387 and Regulation 678/2013] and Lithuania on 1 January 2015 [Decision 2014/509 and Regulation 827/2014]. Hence. the eurozone comprises now 19 Member States.

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