• The irrevocable fixing of exchange rates leading to the introduction of a single currency, the Ecu
• The definition and conduct of a single monetary policy and exchange rate policy the primary objective of both of which shall be to maintain price stability
• And, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition.'
• 'These activities of the Member States and the Community shall entail compliance with the following guiding principles:stable prices, sound public finances and monetary conditions, and a sustainable balance of payments.'

NATIONAL ECONOMIC POLICIES IN EMU

• 'Member States shall regard their economic policies as a matter of common concern and shall co-ordinate them within the Council.'
• 'The Council shall, acting by a qualified majority on a recommendation from the Commission, formulate a draft for the broad guidelines of the economic policies of the Member States and of the Community, and shall report its findings to the European Council ..The Council shall, acting by qualified majority, adopt a recommendation setting out these broad guidelines.'
• 'Where it is established ..that the economic policies of a Member State prove to be not consistent with the broad guidelines referred to' above, or 'risk jeopardizing the proper functioning of economic and monetary union, the Council may, acting by a qualified majority on a recommendation from the Commission, make the necessary recommendations to the Member State concerned.'

MONETARY POLICY IN EMU

• 'A European System of Central Banks (ESCB) and the European Central Bank (ECB) shall be established in accordance with the procedures laid down in this Treaty.'
• 'The primary objective of the European System of Central Banks shall be to maintain price stability.' '
• Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community.'

Tasks of the ESCB

• 'The basic tasks to be carried out through the ESCB shall be:
• to define and implement the monetary policy of the Community;
• to conduct foreign exchange operations consistent with the provisions (outlined below);
• to hold and manage the official foreign reserves of the Member States;
• to promote the smooth operation of payment systems.'
• 'The ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.'

The structure of the ESCB

• 'The ESCB shall be composed of the European Central Bank (in this Treaty called ECB) and of the central banks of the Member States (in this Treaty called national central banks).'
• 'The decision-making bodies of the ECB are the Governing Council and the Executive Board. The Governing Council shall comprise the members of the Executive Board and the Governors of the national central banks.'
• 'The President, the Vice-President and the other (four) members of the Executive Board shall be appointed by common accord of the Governments of the Member States at the level of Heads of State or of Government, on a recommendation from the Council and after consulting the European Parliament and the Governing Council of the ECB. Their term of office shall be 8 years. The mandate shall not be renewable.'

Independence of the ESCB

• 'When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any Government of a Member State or from any other body.'
• 'The Community institutions and bodies and the Governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB and of the national central banks in the performance of their tasks.'
• 'Each Member State shall ensure that its national legislation including the Statutes of its national central bank is compatible with this Treaty and the Statute of the ESCB.'

EXTRACTS FROM THE STATUTES OF THE ESCB

• 'Only members of the Governing Council present in person shall have the right to vote.' although, 'members ..may cast their vote by means of teleconferencing.'
• 'Each member shall have one vote ..the Governing Council shall act by a simple majority. In the event of a tie, the President shall have the casting vote.'
• 'The Executive Board shall comprise the President, the Vice-President and four other members. The members shall perform their duties on a full-time basis.'
• 'The Governing Council shall formulate the monetary policy of the Community including ..decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in the ESCB. The Executive Board shall implement monetary policy.
• 'The Governor may be relieved from office only if he no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct. A decision to this effect may be referred to the Court of Justice by the Governor concerned or the Governing Council.'
• 'The national central banks are an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB.'
• 'The statutes of the national central banks shall ..provide that the term of office of a governor ..shall be no less than 5 years.'
• The ECB may offer advice to and be consulted by the Council, the Commission and the competent authorities of the Member States in the scope and implementation of Community legislation relating to the prudential supervision of credit institutions and to the stability of the financial system ..The ECB may fulfil specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.'
• 'Before the end of 1992, the decision where the seat of the ECB will be established shall be taken by common accord of the governments of the member states at the level of Heads of State or of Governments.'

EXCHANGE RATE POLICY IN EMU

• 'The Council may, acting by unanimity on a recommendation from the ECB or from the Commission, and after consulting the ECB .. conclude formal agreements on an exchange rate system for the ECU vis-a-vis non-Community currencies.'
• 'In the absence of an exchange rate system vis-a-vis one or more non-Community currencies ..the Council may, acting by a qualified majority on a recommendation from the Commission and after consulting the ECB, on a recommendation from the ECB, formulate general orientations for exchange rate policy vis-a-vis these currencies.'
• 'These general orientations shall be without prejudice to the primary objective of the ESCB to maintain price stability.'

NATIONAL FISCAL POLICIES IN EMU

• 'The Member States shall ensure that national procedures in the budgetary area enable them to meet their obligations in this area deriving from this Treaty. The Member States shall report their planned and actual deficits and the levels of their debt promptly and regularly to the Commission.
• The Treaty prohibits overdraft facilities or any other type of credit facility with the European Central Bank or with the national central banks to Community institutions or bodies, Central Governments, regional or local authorities, public authorities, other bodies governed by public law, or public undertakings of Member States and the purchase directly from them of debt instruments.
• Excessive deficits procedure: 'Member States shall avoid excessive government deficits. The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the Member States with a view to identifying gross errors. In particular it shall examine compliance with the budgetary discipline on the basis of the following two criteria:whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, and if so, whether the ratio has not declined substantially and continuously and has not reached a level that comes close to the reference value, or alternatively whether the excess over the reference value is only exceptional and temporary and the deficit remains close to the reference value; whether the ratio of government debt to gross domestic product exceeds a reference value, and if so, whether the ratio is not sufficiently diminishing and not approaching the reference value at a satisfactory pace.
• 'If a Member State does not fulfil the requirements under one of these criteria, the Commission shall prepare a report. The report of the Commission shall also take into account whether the government deficit exceeds the government investment expenditure, and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State.'
• 'The Council shall, acting by a qualified majority on a recommendation from the Commission, and having considered any observations which the Member State concerned may wish to make, decide after an overall assessment whether an excessive deficit exists.'
• 'In cases where a Member State persists in failing to put into practice the Council's recommendations, the Council may decide to give notice to the Member State concerned to take, within a specified time limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation.'
• 'As long as a Member State fails to comply ...the Council may decide to apply or, as the more of the following measures:to require that the Member State concerned shall publish additional information, to be specified by the Council, before issuing bonds and securities; to invite the EIB to reconsider its lending policy towards the Member State concerned; to require that the Member State concerned makes a non interest-bearing deposit of an appropriate size with the Community until the excessive deficit has, in the view of the Council, been corrected; to impose fines of an appropriate size.
• 'The Council shall abrogate any or all of its decisions ..if, in the view of the Council, the excessive deficit in the Member State concerned has been corrected.'
• 'When taking the Council decisions ..the Council shall act on a recommendation from the Commission by a majority of two-thirds of the weighted votes of the Member States, excluding the votes of the Member State concerned.'

PROTOCOL ON EXCESSIVE DEFICIT PROCEDURE

• The reference values referred to above are:
• '3 per cent for the ratio of the planned or actual government deficit to gross domestic product at market prices; 60 per cent for the ratio of government debt to gross domestic product at market prices.'
• In the treaty: 'Government' means General Government, that is Central Government, regional or local funds, to the exclusion of commercial operations; 'Deficit' means net lending; 'Investment' means gross fixed capital formation; 'Debt' means total gross debt at nominal value outstanding at the end of the year.

MONETARY POLICY IN TRANSITION TO EMU

• 'The second stage for achieving economic and monetary union shall begin on 1 January 1994.'
• Before that date, each Member State shall: abolish 'all restrictions on the movement of capital between Member States, and between Member States and third countries';
• 'adopt, if necessary, multi-annual programmes intended to ensure the lasting convergence necessary for the achievement of economic and monetary union, in particular with regard to price stability and sound public finances.'
• 'The Council shall, on the basis of a report from the Commission, assess the progress made with regard to economic and monetary convergence, in particular with regard to price stability and sound public finances and the progress made with the completion of the implementation of Community law concerning the internal market.'
• 'In the second stage Member States shall endeavour to avoid excessive government deficits.'
• 'During the second stage each Member State shall, as appropriate, start the process leading to the independence of its central bank.'
• The Ecu: 'The currency composition of the ECU basket shall not be changed. From the start of the third stage the value of the ECU shall be irrevocably fixed.'
• Functions of the European Monetary Institute: 'At the start of the second stage, the European Monetary Institute (in this Treaty called EMI) shall be established and take up its duties.' '
• It shall ..be directed and managed by a Council, consisting of a President, a Vice-President and the Governors of the Central Banks of the Member States. The President shall be appointed by common accord of the Governments of the Member States at the level of Heads of State or of Government, on a recommendation from ..the Committee of Governors or the Council of the EMI, and after consulting the Council and the European Parliament.'
• 'The EMI shall:
• Strengthen co-operation between the central banks of the Member States; strengthen the co-ordination of the monetary policies of the Member States, with the aim of ensuring price stability;
• Monitor the functioning of the European Monetary System; hold consultations concerning issues falling within the competence of the central banks and affecting the stability of financial institutions and markets; take over the tasks of the European Monetary Co-operation Fund, which shall cease to exist; facilitate the use of the Ecu and oversee the development, including the smooth functioning of the Ecu clearing system.'
• Its other duties include to: 'prepare the instruments and the procedures necessary for carrying out a single monetary policy in the third stage'; 'promote the harmonisation ..of the collection, compilation and distribution of statistics in the areas within its field of competence'; 'prepare the rules for operations to be undertaken by the national central banks in the framework of the ESCB.'
• 'At the latest by 31 December 1996 the EMI shall specify the regulatory, organisational and logistical framework necessary for the ESCB to perform its tasks in the third stage.'
• 'The EMI may, acting by a qualified majority, formulate opinions, or recommendations on the overall orientation of monetary policy and exchange rate policy as well as on the respective measures introduced in each Member State.'
• 'The EMI may, acting unanimously, publish its opinions and its recommendations.'

PROTOCOL ON OPERATION OF EMI

• 'The opinions and recommendations of the EMI shall have no binding force.'
• 'The EMI shall be entitled to hold and manage foreign exchange reserves as an agent for and at the request of national central banks ..transactions with these reserves shall not interfere with the monetary policy and exchange rate policy of the competent monetary authority of any Member State.'
• 'The operations of the EMI shall be expressed in Ecu.'
• 'Before the end of 1992, the decision where the Seat of the EMS will be established shall be taken by common accord of the Governments of the Member States at the level of Heads of State or of Governments.'

CONVERGENCE CRITERIA FOR ENTRY TO EMU

• 'The Commission and the EMl shall report to the Council on the progress made in the fu1filment by the Member States of their obligations regarding the achievement of economic and monetary union.'
• 'The reports shall also examine the achievement of a high degree of sustainable convergence by reference to the fulfilment of each Member State of the following criteria:the achievement of a high degree of price stability; this will be apparent from a rate of inflation which is close to that of at most the three best performing Member States in terms of price stability; the sustainability of the government financial position; this will be apparent from having achieved budgetary positions without a government deficit that is excessive as determined above; the observance of the normal fluctuation margins provided for by the Exchange Rate Mechanism of the European Monetary System, for at least two years, without devaluing against any other Member State currency; the durability of convergence achieved by the Member State and of its participation in the Exchange Rate Mechanism of the European Monetary System being reflected in the long-term interest rate levels.
• 'The reports of the Commission and the EMl shall also take account of the development of the Ecu, the results of the integration of markets, the situation and development of the balances of payments on current account and an examination of the developments of unit labour costs and other price indices.'

PROTOCOL ON CONVERGENCE CRITERIA

• The details of the convergence criteria are:
• 'Price stability' means that a Member State has a price performance that is sustainable, and an average rate of inflation, observed over a period of one year before the examination, that does not exceed that of at most the three best performing Member States in terms of price stability by more than 1 1/2 percentage points. Inflation shall be measured by means of the consumer price index (CPI); the 'government budgetary position' condition means that at the time of the examination the Member State is not the subject of a Council decision ..that an excessive deficit exists for the Member State concerned; convergence of interest rates means that observed over a period of one year before the examination, a Member State has an average nominal long-term interest rate that does not exceed that of at most the three best performing Member States in terms of price stability by more than 2 percentage points. Interest rates shall be measured on the basis of long-term Government bonds or comparable securities.

TIMING OF MOVE TO EMU

• 'On the basis of these reports, the Council shall, acting by a qualified majority on a recommendation from the Commission, assess for each Member State whether it fulfils the necessary conditions for the adoption of a single currency; whether a majority of the Member States fulfils the necessary conditions for the adoption of a single currency; and recommend its findings to the Council, meeting in the composition of the Heads of State or of Government.'
• 'The Council, meeting in the composition of Heads of State or of Government, shall, not later than 31 December 1996, acting by a qualified majority, decide on the basis of the recommendations of the Council referred to:'
• 'Whether a majority of the Member States fulfils the necessary conditions for the adoption of a single currency; whether it is appropriate for the Community to enter the third stage of economic and monetary union "

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