Relaxation of Maastricht – not a good idea

As the financial crisis drags on, one of the big winners has certainly been euro membership. Being offered shelter from the storm of volatile exchange rates has lead to a surprising line of countries that would like to fast track EMU membership.

 

But while the potential short-term benefits for the applicants are clear (foremost access to almost unlimited funding in a major global reserve currency), those for the existing club members are much less so. In the longer-term benefits of EMU entry do not exist for either standing members or applicants.

 

I personally, have never been much of a fan of the Maastricht criteria for access into EMU for the simple fact that they are just a measure of temporary nominal rather than permanent real convergence. The difference between those two is especially important in a currency union that in all other institutional categories apart from sharing a currency is still based along national lines. If the divergence in real per capita income between member states is large, the desirable catch up process implies a need for significant swings in the current account position. But if neither labour mobility (hampered within the EU by different social security systems) nor a fiscal transfer mechanism exist, the burden of adjustment has to be taken solely by workers in the form of outsized swings in unit labour costs (aka compensation). The Maasticht criteria completely ignore this factor of real convergence.

 

With the exception of Denmark – here no doubt exist either on the side of nominal nor real convergence with EMU – I don’t see a potential candidate that would meet even the nominal convergence criteria. But adding further cases in excess of the currently troubled countries at EMU’s periphery that would have to do their balance-of-payments adjustment the hard way within EMU, is certainly over the top.

 

While the Maastricht criteria are less-than-useful in themselves to determine EMU membership, watering them down to “no-convergence-at-all” is not an appropriate solution either.

2 Responses to "Relaxation of Maastricht – not a good idea"

  1. TA, Hungary   February 16, 2009 at 4:03 am

    Which hurts more? Not to allow troubled CEECs, and let to collapse their currencies, which would than may break down Italy, Austria, Belgium, Holland through their banks? Or allowing immediately into the euro-zone the CEECs, whose economies are more or less integrated into the eurozone anyway and see what happening after that? I guess, the first version may lead to catastrophe within half year, the second version may avert the catastrophe. Anyway, as far as I see the number of current memberstates, none of the CEECs would fare worse inside the euro-zone than Spain, Ireland, Greece, Italy. Moreover, with the heavy devaluation of their currencies (and sure Baltic countries has to leave the peg also within very short time) these countries may better equipped now to euro membership than Ireland, Spain, Slovakia etc.

  2. David F. Milleker   February 16, 2009 at 3:09 pm

    Well, the CEECs have two options a) accept devaluation and the massive short-run growth problems that come with this currency realignment but gain competitiveness for the long run or b) offer sufficiently high interest risk premia by raising interest rates.Joining EMU would just postpone the day of reckoning for the economic adjustment would then take the form or years of stagnation in order to get current account imbalances sorted out. Whether the CEECs are better equiped to deal with real wage adjustments in order to facilitate a current account adjustment, I don’t have a reasonable guess on. But I can hardly imagine that EMU needs even more countries with this kind of problem right now. And: Italy and Spain joined EMU with a current account surplus position while at the moment none of the CEECs has this kind of advantage.