European monetary policy coordination

Abstract

During the second stage of emu, monetary policy in the Member States of the European Union will face serious challenges. The transition to full monetary union, to be achieved by 1 January 1999 at the latest, presupposes the attainment of a sufficient degree of nominal convergence and the completion of the technical preparations and institutional changes required for the conduct of a single monetary policy. A central issue for monetary policy is how to achieve the internal and external stability objectives necessary for the transition to monetary union in an environment of increased capital mobility, financial integration and decentralized economic policy making by Member States. The Maastricht Treaty, which specifies the convergence criteria Member States must meet in order to participate in emu, contains a number of provisions specifically aimed at facilitating the convergence process and at contributing towards the adoption of compatible monetary and fiscal policies. The establishment of the European Monetary Institute has as a primary objective to conduce to the attainment of nominal convergence through the strengthening of the coordination of stability-oriented monetary policies in the Union. In addition, the Treaty provisions which prohibit central bank financing of the public sector and its preferential financing by the banking system, with effect from the beginning of 1994, aim at enhancing the effectiveness of monetary policies and at achieving greater fiscal discipline in Member States. Finally, the implementation of the excessive deficit procedure within a new framework of multilateral surveillance intends to gear fiscal policies towards the fulfilment of the fiscal convergence criteria and the adoption of an appropriate policy mix. These Treaty provisions, however, cannot by themselves guarantee the necessary nominal convergence and the effective conduct of monetary policies.