By Francisco Torres, Francesco Giavazzi
This quantity analyzes the eu Community's transition to fiscal and fiscal union (EMU) within the mild of the agreements reached at Maastricht final yr. It derives from a convention held by way of the CEPR and the financial institution of Portugal, and contains between its individuals a few famous educational commentators on eu integration. the problems addressed within the quantity contain: the connection among a standard foreign money and inflation convergence; the consequences of economic unification on Europe's more and more built-in monetary markets and monetary platforms; and EMU's implications for the EC's long term progress.
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The model's failure is more likely due to its implicit - and implausible assumption that the credibility of exchange rates is constant. It was pointed out during the conference that the main weakness of the simple target zone model was the assumption of rational expectations in the foreign exchange market, for which there is no evidence in favour and a great deal against. As the internal market proceeds together with increased goods and financial market integration it may be possible that, even well before the introduction of a single currency, domestic money markets will not survive without perfectly syncronized national monetary policies.
This would provide efficient preparation for full joint management in the final stage. Centralization may also offer some potential for cost savings. The EMI Statute foresees that some centralization of foreign-exchange operations could take place on a voluntary basis in Stage II. 4 states: The EMI shall be entitled to hold and manage foreign exchange reserves as an agent for and at the request of national central banks.. . The EMI shall perform this function on the basis of bilateral contracts..
These are: the convergence of inflation and interest rates; the fluctuations of the respective currencies not exceeding the narrow ERM bands for at least two years without any central parity changes; a budget deficit not exceeding 3% of gross domestic product; and a gross public debt not exceeding, or converging to, 60% of gross domestic product. Niels Thygesen examines the role of Stage II of EMU in the following chapter. The Treaty has unambiguously set 1 January 1994 as the starting date for Stage II and has relaxed the conditions to be met by that date.