In December 1991, in the small town of Maastricht in the Netherlands, the European Union (EU) established the Maastricht Treaty, which offers the EU an opportunity to become a political and economic world superpower. The treaty provides for a single European currency, common citizenship, common foreign and security policy, a more effective European Parliament, and a common labor policy. Each of these goals presents some challenges for the countries involved, such as setting a new monetary policy. As all 12 EU countries have approved and/or ratified the treaty, it's monetary policies have been set in action. However, the sovereignty movement within the nation states may become an obstacle to the success of the Maastricht treaty, and future ratifications of the treaty are very likely.

The original goal of the EU was to establish a bloc of countries within which goods could be traded tariff-free and without quotas. The Maastricht Treaty would establish a single EU currency (the ECU); provide the EU with more power to deal with such matters as the environment, education, public health, and communications among members; establish a common foreign and defense policy; and create greater cooperation among the 12 police and justice systems. The concept of a monetary and an economic union was for the first time raised in the treaty of Maastricht in December 1991. This area was the most significant thing that marked the difference between this treaty and the treaty of Rome which was drafted in 1957, and put into action in 1958. The success of the economic and monetary integration of the European Union will be detrimental for the future of the union. In this paper, I would like to discuss the monetary and economic conditions that the nation states will have to satisfy, before they can enter the economic and monetary union. In addition, I would like to evaluate the success of the treaty from an economic and monetary point of view, and try to determine if a central bank will be reality in July 1997, and if a single currency, supporting all the three functions of a currency will be available in the beginning of 1999.

At the treaty of Maastricht, it was decided that there are five economic and monetary conditions/requirements that have to be fulfilled before a nation state is allowed to join the European Monetary Union. All of these conditions have to met by the individual nation states in the European Union. The requirements are extremely strict, as the key to success of the European Union will lay in convergence of the economies of the individual nation states. All nations will need to maintain a similar economic standard. The five criterion's of standards developed in the Maastricht treaty will insure that there is economic compatibility within the member nations. Here follows a summary of the requirements that the countries have to meet, and the countries that are meeting them.

The first of the five economic criterion's concerns price stability in the nation states. An effective way of calculating price stability is to analyze the inflation rate for each one of the nations. To create a fair determinant to the level of inflation that is accepted, an average is taken of the three nations with the lowest inflation rates of all the nation states in the European Union. It would have been impossible to set a fixed determinant during the drafting of the treaty, as global economic conditions are changing. However, it was possible to set the maximum percentage of fluctuation allowed above the average determinant. The rate of inflation of the nation states may not exceed 1.5 percent of this control value. For the fiscal year of 1993, the average of the three nations with the lowest inflation was 1.5% (Britain, Denmark, and Ireland). Thus, the control value is equal to 1.5 percent, 1.5 percent is added to the control, and 3 percent is derived. Only nations that have an inflation rate in the same fiscal period that is less than or equal 3 percent will qualify. Only six countries out of the twelve in the union qualifies. These countries are; France (2.1%), Britain (1.6%), Holland (2.2%), Belgium (2.7%, Denmark (1.3%), and finally Ireland (1.6%). Please refer to Appendix 1, diagram #1.

The second criterion that was considered to be important is the long-term interest rates of the nations. These interest rates are directly related to the economic activity in the nations. It can be controlled to a certain extent by the individual governments, as they can adjust the long-term interest rate to fit the country's long-term economic needs. Typically, if the rate is increased, the economy would slow down, and vice versa. Obviously, price stability and inflation can be directly related to the long-term interest rate. Therefore, it was decided at the treaty of Maastricht that the long-term interest rate must not exceed by more than two percent points of the average long term interest rate of the three member nations with the lowest inflation rates. The average long-term interest rate of the three nations with the lowest inflation rates is 7.8 percent (Britain, Denmark, and Ireland). Therefore, the nations must have a long-term interest rate below 9.8 percent (7.8+2). Nine members meets the requirement, and only Italy (10.1%), Spain(10.8%), and Greece(23.9%) do not meet the standard. Please refer to Appendix 1, diagram #2.

The third condition that has to be met regards the stability of currencies. Before a fully functioning European Currency Unit can be reality in 1999, the nation states will have to ensure that there is economic compatibility within the states. The European Currency Unit (ECU) is used as the control unit, against which the nation's individual currencies are compared. According to the treaty, currencies are not allowed to fluctuate more than 2.5 percent on an upper and lower boundary of the ECU. A "Tube" effect has been created, in which currencies are revised when these are not able to stay within the limits. By revising the currency, nations are able to theoretically stay within the 2.5 percent boundary.

The fourth economic condition that the nation states have to satisfy deals with the national average budget deficit. The budget deficit demonstrates the relative strength of an economy. In addition, it also gives us a fair idea of government policies and political aspects of the individual nation's monetary systems. The treaty states that the national average budget deficit (budget balance) may not exceed three percent of a nation's Gross Domestic Product (GDP). Only two nations satisfy this requirement. These two nations are; Ireland (3.0%), and Luxembourg (2.5%). The average budget deficit in the community is 6.64 percent, with values ranging from 2.5% to 15.4%.

The perhaps most difficult condition that the individual nation states have to met is the fifth condition. The criterion for this condition is the following; The public cumulative debt may not exceed sixty percent of the national Gross Domestic Product. The key word in this condition that makes it so difficult to fulfill is "Cumulative". That makes a nation's economy less dependent on short-term government intervention against an economy. It takes a long time to lower the cumulative debt, as it is generally increasing, as interest on debt may be paid in buying new debt. The cumulative debt criterion gives us the best determinant for analyzing the strength of an economy. In many cases, the cumulative debt exceeds the GDP. These nations actually have more liabilities than assets during a period of time. Some economists argue that the best way to decrease the ratio of cumulative debt to the GDP is to try to increase the GDP of a give nation. Presently only five nations meet this requirement. These nation states are; Germany (45.0%), France (39.2%), Britain (47.3%), Spain (48.8%), and finally Luxembourg (7.3%). .

As demonstrated above, presently no single nation in the European Union meets all the five requirements (please refer to diagram 1A). The ultimate goal of the Maastricht treaty is to facilitate a monetary and economic union with a single currency by 1999. Will all of the nation states be able to meet the strict requirements needed to seek participation by 1999? The whole purpose of an economic union is to tie the economies in the EU together, and foster economic cooperation-operation and strength. Will this be reality, if only a few of the member nations are able to satisfy the entry requirements, and how can a single currency be formed, when only a portion of the twelve members are able to join the union? I will try to answer these questions below.

Turmoil in the European Monetary System has significantly increased the odds against monetary union being established in Europe. The European governments underestimated the degree of deflation and the level of interest rates that the Maastricht Treaty, would impose on member countries' economies. One may ask if the conditions stated in the ratified treaty will be reachable for many nations. For instance, Greece is currently facing an inflation rate of 14.7 percent, a budget deficit of 15.4 percent, a long-term interest rate of 23.9 percent, and finally a cumulative debt of 106.7% of its GDP. How is this nation going to be able to meet the requirements by 1999? That would be a miracle. Factors such as the cumulative debt will take a long time to decrease.

The forces of ethnicity, nationalism, and economics are beginning to overwhelm the drive for European integration. The German mark's strength in the international financial system has caused other Europeans to worry that the mark will dominate their currencies. Simultaneously, Germans are worried that a common European currency will result in a decrease of the role of Germany's financial system. In addition, the mark bolsters a sense of German nationalism that runs counter to the European identity. A separate currency gives a nation a sense of nationhood, and gives the individual nations total control over economic and monetary policies.

The Maastricht treaty on the economic and monetary union of the EU gives us a foundation for a single currency unit, and common economic and monetary policy, but the treaty alone will not guarantee a union. The economic requirements that the individual nation states have to meet allow "considerable discretion".The nations that will not be able to adopt the single currency on purely economic grounds should be able to adopt it for political reasons. Otherwise, a split among the nations in the EU will be definite, and this split could easily cause a collapse of the union.

A Monetary union is indeed needed to support a single European market and a single currency. Without a monetary union, the EU will not be able to create a central bank (proposed deadline for such an institution is set to take affect in June, 1997). Without a central bank, it will be impossible to create an European Currency Unit that would support the three functions of money. Presently, only two nations have made their central banks independent from their governments. The Bundesbank in Germany has been independent from the German government since it was created in 1871. On January, 15 1994, the Banque de France became independent of the French government. This move by the French government puts the country in compliance with phase two of the Maastricht treaty, which calls for independent central banks in member states. Monetary policy at the new Banque de France will now be determined by a nine-member Monetary policy committee, which cannot accept directions from the government or from anywhere else. The French move towards a "privatization" of its central bank may make France ready for a the establishment of the European central bank in Frankfurt, and gradually deregulate the amount of government control over its monetary policies. Perhaps, all the member nations should follow Germany's and France's approach, and establish central banks totally independent from the government.

Future ratifications of the treaty may impose a threat towards the success of the EU. Presently, only two nations did decide to ratify the Maastricht treaty from its original form. Denmark's ratification of the Maastricht Treaty gave the nation a series of concessions by the European Union (EU) to limit Denmark's surrender of sovereignty. Under these concessions, Denmark will not have to participate in a unified currency, a joint defense policy, a common immigration policy, a common legal system, or a system of common citizenship. Great Britain decided during the drafting of the treaty that they would not make a final decision concerning the nation's involvement in a monetary union until 1997. As other countries seek to build on these precedents, there may be little left of the treaty, "which is based on an elitist dream of a monstrous statist bureaucracy", that would eliminate the economic and political freedom of the individual nation states.

Even though that the Maastricht treaty is presently fully ratified by the nation states, it is only two years old, and is still in its infant stage. Future ratifications and changes will occur, and an economic union, with a central bank and a single currency will probably be available to a few of the nation states in 1999. The majority of the nations will not meet the economic and monetary requirements needed for participation. These requirements cannot be too lenient, as economic convergence must exist between the nation states. It is impossible to simply merge weak and strong economies together, and form a powerful monetary union. These nations will have to keep their individual currencies, and the European Currency Unit will still be treated as a common currency. The political and economic strength of the EU lays in its individual nation states working together. A monetary union with only a few member states, will not be as powerful as a fully integrated union.

BIBLIOGRAPHY/WORKS CITED.

1. Bean, Charles R. "Economic and monetary union in Europe." Journal of Economic Perspectives. v6 Fall 1992 (31-52)

2. "Converging Towards Union?" The Economist 15 January 1994 (76)

3. Dowd, Kevin "An imperfect union: the Maastricht Treaty could not deceive the markets." Barron's v74 January 10 1994 (10)

4. Franklin, Daniel "Better late than never." The Economist v328 July 3 1993 (13-15)

5. Habermeier, Karl "A single currency for the European Community." Finance and Development v29 September 1992 (26-29)

6. Howell, Llewellyn D. "Nearing the limits on European integration." USA Today (Periodical) v121 November '92 (51)

7. Leonard, Dick "Eye on the EU." Europe (European Economic Community) December 1993/ January 1994 (4)

8. "Oui! for French independence (of Banque de France)." The Banker v144 February 1994 (6-7)

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