(1) Council Decision of 12 March 1990 on the attainment of progressive convergence of economic policies and performance during stage one of economic and monetary union, (90/141/EEC); Council Decision of 12 March 1990 amending Council Decision 64/300/EEC on co-operation between the central banks of the Member States of the European Economic Community, (90/142/EEC).

(2) Council Directive of 24 June 1988 for the implementation of Article 67 of the Treaty, (88/361/EEC).

(3) Treaty on European Union, Office for Official Publications of the European Communities, Luxembourg, 1992.

(4) Conclusions of the Presidency of the European Council, Hanover, 27-28 June 1988.

(5) Report on Economic and Monetary Union [‘Delors Report’], Committee for the Study of Economic and Monetary Union, Office for Official Publications of the European Community, Luxembourg, 1989.

(6) Six years on, this concern still resonates in central banks. “I nevertheless find it difficult to judge now whether or when the necessary conditions can or will be met. (….) It would be unfortunate nevertheless if, in moving in the right direction, some countries felt obliged to move at a pace that was driven by artificial deadlines rather than at a pace appropriate to their national circumstances”:, Eddie George, Governor of the Bank of England, in Economic Integration in Europe, Address to the Institut d'Etudes Bancaires et Financires, Association Franaise des Banques, 31 January 1995.

(7) Conclusions of the Presidency of the European Council, Madrid, 26-27 June 1989.

(8) For a description of the main points of contention and how these evolved in the course of the negotiation, see The Transition to EMU in the Maastricht Treaty, Bini-Smaghi, L., Padoa-Schioppa, T., and Papadia, F., Essays in International Finance, No 194, Princeton, November 1994.

(9) See International Capital Movements and Foreign Exchange Markets, Report to the Ministers and Governors by the Group of Deputies, Group of Ten, April 1993. The report notes that net purchases by foreigners of domestic securities in the United Kingdom, Italy and Sweden amounted to $112 bn in the 2½ years to mid-1992, while net portfolio inflows into Spain amounted to $27 billion, and these were mostly predicated on continued convergence. It also attributes to convergence trading in ERM currencies the growth of short-term global income funds in the United States which are estimated to have grown from virtually zero at the end of 1989 to $25 bn by mid-1992.

(10) So far the Council of the European Monetary Institute has confined itself to an Opinion, endorsed by the Council of Economic and Finance Ministers (ECOFIN) that ‘in the current circumstances, [it] considers it advisable to maintain the present arrangements and that member countries should continue to aim at avoiding significant exchange rate fluctuations by gearing their policies to the achievement of price stability and the reduction of fiscal deficits, thereby contributing to the fulfilment of the requirements set out in Article 109j(1) of the Treaty and the relevant Protocol’. Annual Report 1994, European Monetary Institute, Frankfurt.

(11) Wim Duisenberg., Governor of the Nederlandsche Bank, sees ‘no chance that the Maastricht criteria would be met by a majority of [Member States] in two years' time. See interview in Le Monde, 31 January 1995. Hans Tietmeyer, President of the Bundesbank, does not think that there is ‘any likelihood’ that the majority of Member States will meet the Maastricht criteria for Stage 3 by 1997 and ‘for the time being [he] can not see that a two-thirds majority of [the Member States] will say that it is appropriate to move to a monetary union’. See interview in The Guardian, 16 March 1995. The European Commission, however, believes that a majority of Member States might be ready to move to Stage 3 in 1997: see The Progress of EMU in Everybody's Europe, speech by Giovanni Ravasio, Director General, Economic and Financial Affairs (DG XV), Federal Trust Conference, London, 17 November 1994.

(12) ‘It seems to me perfectly healthy that some [Member States] should integrate more closely or more quickly than in others’: UK Prime Minister John Major, William and Mary Lecture, University of Leiden, 7 September 1994. He does, however, add: ‘I see real danger in talk of a “hard core”, inner and outer circles, a two-tier Europe. I recoil from ideas for a union in which some would be more equal than others’.

(13) Reflections on European Policy, Wolfgang Schable and Karl Lamers, CDU/CSU-Fraktion des Deutschen Bundestages, 1 September,1994.

(14) French Prime Minister Edouard Balladur envisages the nations of Europe forming three circles, (with three types of organisation—monetary, economic and diplomatic and defence) and moving at several speeds while preserving an effective central core. See interview in Le Figaro, 30 August 1994, and article for The Guardian/Le Monde, 1 December 1994.

(15) See Padoa-Schioppa, T., The Road to Monetary Union in Europe, Clarendon Press, Oxford, 1994.

(16) An expression used in two separate reports to the ECOFIN Council in April 1993: Implications and Lessons to be Drawn from the Recent Exchange Rate Crisis, Committee of EC Central Bank Governors and Lessons to be Drawn from the Disturbances on the Foreign Exchange Markets, EC Monetary Committee.

(17) Model-based simulations of fiscal policy shocks under different exchange rate regimes, presented in Box D, pp. 51-52, in the World Economy chapter of this Review, lend support to this proposition. Review. See also simulation results reported in Whitley, J.D., ‘Aspects of Monetary Union’, in Barrell, R. and Whitley, J. (Eds), Macroeconomic Policy Coordination in Europe, NIESR, Sage Publications, London (1992),

(18) This danger was foreseen in the ‘Delors Report’: ‘Rather than leading to a gradual adaptation of borrowing costs, market views about the creditworthiness of official borrowers tend to change abruptly and result in a closure of access of access to market financing. The constraints imposed by market forces might be either too slow and weak or too sudden and disruptive.’

(19) The potential problems which may result from such differences under a common monetary policy are noted in a special Box in the 1994 Annual Report of the EMI. For a description of the structures of personal and company sector fixed and floating-rate debt and the implications for the monetary transmission mechanism in a number of industrial countries, see Miles, D., ‘Fixed and Floating-Rate Finance in the United Kingdom and Abroad’, Bank of England Quarterly Bulletin, Vol.3 No.1, February 1994. For econometric evidence of cross-country differences in the degree of stickiness in lending rates, see Cottarelli, C., and Kourelis, A., ‘Financial Structure, Bank Lending Rates and the Transmission Mechanism of Monetary Policy’, IMF Working Paper No. WP/94/39, International Monetary Fund, March 1994.

(20) Report of the Monetary Committee to ECOFIN, July 1990, quoted in Bini-Smaghi,L., et al., (1994), see (8) above. At that time the key decision was assumed to be that between Stage 1, which would be a quite lengthy period in which convergence was achieved, and Stage 2 which would be a short period of transition.

(21) This is not synonymous with the European Council which, unlike the Council of Ministers, has no power to take legally binding decisions and includes as an equal among its members the President of the Commission.

(22) The European Union created by the Maastricht Treaty is a structure with three ‘pillars’: two of these—common Foreign and Security Policy and justifce and Home Affairs—so far provide only for inter-governmental co-operation rather than supra-national competence; the European Community continues, now as the third pillar of the Union, to encompass all policies derived from the original Treaties, in which some measure of competence has passed to the European level. In this Note the term Community or EC is used throughout to avoid possible confusion with Economic and Monetary Union.

(23) This is noted in the 1994 Annual Report of the EMI, which goes on to argue that countries with high debt ratios may need to achieve deficits smaller than 3 per cent of GDP if they are to demonstrate that their debt ratios are diminishing sufficiently.

(24) Ruling of the Federal Constitutional Court, 2 BvR 2134/92 and 2 BvR 2159/92,12 October 1992. The ruling also states that the date of entry into Sage 3 is ‘to be regarded as an objective date rather than a legally binding deadline’.

(25) Luxembourg is treated, in this analysis of trade patterns as a member of the inner ring rather than the core since a geographical breakdown of its trade is not available separately from that of Belgium.

(26) At current exchange rates. Using standardised ‘International dollar’ exchange rates, which incorporate an allowance for estimated differences in the cost of living, per capita income in Portugal and Greece is half that of Sweden and Germany (see Table 6, column 4).

(27) Estimated in ‘International dollar’ terms, these differences are only perhaps a half to one third as great but the estimated cost-of-living comparisons entailed in such calculations are acknowledged to be particularly unreliable in the case of newly-liberalising command economies.

(28) Baldwin, R.E., Towards an Integrated Europe, CEPR, London 1994.

(29) Pisani-Ferry, in a detailed analysis of the origins of the 1992-93 ERM crisis and its differential effects among the eleven participating countries, observes that during the period in which central rates in the parity grid remained unchanged, both the costs (from loss of the exchange rate as an instrument of adjustment to asymmetric shocks) and the benefits (deriving from exchange rate stability) of EMU may have seemed small, 'supporters and opponents of EMU giving the impression of arguing about the sign of a magnitude in the region of zero’; the subsequent exchange-rate turbulence resulting from asymmetric pressures has made both the risks and the rewards of EMU more visible—‘the stakes have been raised’. See Pisani-Ferry, J., ‘Union monétaire et convergence: qu'avons nous appris?’, Working Paper No. 94-4, CEPII, Paris December 1994.

(30) Reports by the EC Monetary Committee and the Committee of EC Central Bank Governors to the ECOFIN Council, April 1993, see (16) above.

(31) For a contrary view, in which monetary leadership in a Stage 2/ Stage3 ERM by the ECB and the ‘union ECU’ would be more appealing to EC Member States excluded from the union than the present Bundesbank-and Deutschemark-dominated ERM, see Schioppa, C., ‘The Relationship Between the Single Currency and the Other Currencies in the Union: Is there EMS after EMU?’ in ECU No.31-1995/II, ECU-Activités asbl, Brussels 1995.

(32) Britton, A., and Mayes, D., Achieving Monetary Union in Europe, AMUE and NIESR, Sage Publications, London 1992.

(33) Kenen, P.B., EMU After Maastricht, Group of Thirty, Washington 1992. Elaborating a year later, he notes that the Maastricht Treaty ‘contemplates arrangements even less symmetrical than those of the present EMU’ and that ‘a two-speed approach could greatly damage the cohesion of the EC without conferring very large economic benefits on the fast-speed countries’, asking ‘what price would the fast-speed countries pay for scuttling the Maastricht Treaty?’: see Kenen, P.B., ‘EMU Reconsidered’, mimeo, 1993.