Maastricht Treaty

Topics: European Union, Eurozone, Euro Pages: 8 (2889 words) Published: January 29, 2013
Joseph Winn
Suzanne May

Redrafting the Maastricht Treaty
The May-Winn Act

The Maastricht Treaty was signed on February 7, 1992 in Maastricht Netherlands. The treaty led to the creation of the euro, and created what is commonly referred to as the pillar structure of the European Union. The treaty established the three pillars of the European Union: European Community, Common Foreign and Security Policy, and the Justice and Home Affairs. The convergence criterion that member states would have to fulfill to show they were eligible to join the single currency area had four basic elements. First, prospective Eurozone members had to keep a tight lid on inflation; specifically no more than 1.5% points higher than the average of the three best performing (lowest inflation) members of the EU. Secondly, there were strict rules on the annual deficits and overall debt; the ratio of the annual government deficit to GDP must not exceed 3% at the end of the preceding fiscal year and the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. The third criterion states: members have to join the exchange rate mechanism for at least two years, and they were prohibited from devaluing their currency. Finally, long-term nominal interest rates had to be held down; nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states. The May-Winn Act will be a treaty revision that holds of the formation of the European Monetary Union until the EU is fully integrated, will put systems in place that redesign the way member countries are audited to ensure fiscal discipline, and will revise the convergence criterion for when Europe is truly integrated and ready to form a common currency.

The May-Winn Act revision of the Maastricht Treaty will eliminate premature plans for a common currency (the Euro), until the European Union is fully integrated. This revision is invoked from Balassa’s emphasis on the order of integration process and the preconditions for forming a monetary union. Balassa’s original OCA theory points out a serious threat in integration taking place in the wrong sequence: “According to his logic the common currency is not a tool of integration, but, rather the fruit of the already successfully implemented real integration, which can be platform of further development.” Despite significant convergence of nominal variables, the economies of the potential member countries varied a lot in terms of GDP growth, labor productivity and unemployment rates. The degrees of integration of labor, goods, and financial markets were generally considered to be lower than in the United States, the conventional OCA benchmark case. Taking the OCA conditions seriously would therefore have meant to postpone or even to abandon the EMU project. Since the Maastricht Treaty prematurely introduced the euro (1999), in hopes that it would grow and eventually become an optimum currency area, Europe has experienced a Myrdal-type circular cumulative effect that condemns the less developed to a downward spiral. The expected convergence of prices and wages has not been achieved; the more advanced gained further competitiveness and the less developed lost competitiveness. This idea is represented in (figure 1 and 2), showing Portugal, Italy, Ireland, Greece, and Spain (PIGGS) further deterioration of balance of trade and income, in comparison with a steeply upward trending Germany. Because Germany has international companies with very strong positions on the world market, it was able to take advantage of the common currency. Figure 1:

Figure 2:

While data shows that the introduction of a common currency; although beneficial for strong economies (Germany), it has been the catalyst and the amplifier of the deteriorating competitiveness of weaker countries (PIIGS). In consequence of the tendency of inflation, characteristic of the weak countries,...
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