Thirty years ago, on 7 February 1992, the EU heads of state and government signed the Treaty of Maastricht, comprising the blueprint for European Economic and Monetary Union (EMU). The treaty stipulated three steps towards the goal of monetary union and formulated a new governance framework for the common currency. Three decades after the decision, it is time to reflect: where do we stand with EMU and the euro?

The time of the Maastricht Treaty was not a quiet era in European integration. Negotiations on the common currency were intense and hard-fought among EU member states. And immediately after signing the Maastricht Treaty, trouble loomed for the EMU project. Convergence among the member states wishing to join seemed far away and the Maastricht Treaty experienced ratification difficulties in several EU countries. Most importantly, the “ERM crisis” (short for Exchange Rate Mechanism) turned the irrevocable fixing of exchange rates, one of the key pillars of EMU, into a distant prospect. In 1992, several European economies that were part of the existing ERM in which participating countries’ exchange rates fluctuated within fixed margins were hit by speculative currency flows that made the existing parity grid of the ERM untenable. It forced Spain and Ireland to devalue their currencies and the United Kingdom and Italy even to withdraw from the ERM.

These problems notwithstanding, the Maastricht Treaty came into force in 1993 and the common currency was introduced in 1999, with banknotes and coins replacing national moneys three years later, in 2002. The euro has since become the second most widely used currency in the world, after the US dollar. Together with the free movement of persons, the Erasmus exchange program for students and the abolition of roaming charges within the EU, the euro has become one of the most tangible achievements of European integration. At the occasion of the 30th anniversary of the signing of the Maastricht Treaty, we take a look back. What were the goals and aspirations for the common currency that were enshrined in the treaty? And where do we stand 30 years on?

1) Exchange rates, prices, public finances: overall priority on stability

Although previous initiatives for a European currency had failed, discussions were revived in the mid-1980s. Several leading European politicians called for greater monetary integration in the wake of the Single European Act of 1986 and the “1992 program” of completing the single market. One of the hurdles to the completion of the Single Market was seen in the volatile exchange rates between the members’ currencies, which made cross-border trade more costly. The Delors report that was prepared for the European heads of states and government proposed concrete stages leading towards EMU and laid the foundations for the single currency.

There is a consensus that the institutional design of EMU rested on a bargain between France and Germany. Particularly for Germany, fixing exchange rates within a monetary union had to be combined with institutionalizing the principle of price stability with the help of an independent European Central Bank (ECB). France agreed to these principles. However, early in the Maastricht negotiations, the French side made it clear that central bank independence should only be realized within a strong political framework at the EU level. The so-called “gouvernement économique”, a European economic government of sorts as a political counterpart to the independent central bank, became one of the core elements of the French vision for the governance of the single currency. For many politicians in Germany, however, the French proposals for an economic government (whose potential tasks were in fact never clearly described) were a taboo. In the end, a strong anti-inflationary mandate and the depoliticization of monetary policy with the help of an independent central bank modelled on the Bundesbank were the core German demands on the euro architecture that eventually found their way into the Maastricht Treaty.

During the treaty negotiations, there was also a broad commitment among the future euro members to budgetary discipline. The debate revolved primarily around the strength of the implementation mechanisms and the use of sanctions. For Germany, a stability-oriented budget policy meant strict rules against excessive budget deficits and treaty-based penalties for non-compliance. In preparation for the introduction of the single currency, the Stability and Growth Pact (SGP) was adopted in 1997 at Germany’s request to guarantee sustainable public finances in the long term. The pact was to prevent governments from accumulating excessive debt that would endanger the stability of the euro. The 3%-deficit and 60%-debt rules that the SGP institutionalized can be traced back to the Maastricht Treaty’s convergence criteria that had to be fulfilled by member states to join the common currency.

Thirty years on, it turns out that the Maastricht concept of stability was too narrow for monetary union. Budgetary stability was and is a crucial element of the monetary union’s framework, as a low-debt country may have more leeway for countercyclical policies in times of crisis. Particularly the euro crisis has shown that other factors such as macroeconomic imbalances between member states, a lack of adaptability to different economic cycles, a lack of crisis management instruments, too lax banking supervisions in some member states and the danger of a self-reinforcing dynamic between weakened banks and over-indebted states should be taken into consideration when it comes to the stability of the euro area.

Moreover, the fiscal framework itself – particularly its deficit and debt targets – has proven to be of limited functionality. It has neither ensured budgetary discipline in good times, nor does it provide member states the fiscal framework needed to deal with major challenges such as climate change and digitization that call for considerable investments over the coming years. The most recent call for reform of the fiscal rules from Italian prime minister Mario Draghi and French president Emmanuel Macron therefore points to an old problem which is, 30 years after Maastricht, more pertinent than ever.

2) A fateful compromise on economic convergence

Upward convergence – whereby EU member states’ economic development improves, while the gap between countries narrows – has always been an important political aspiration of the EU. Member states join the EU with the expectation that socioeconomic objectives will be achieved and working and living conditions will improve in their country.

This overall political goal notwithstanding, one point of conflict in the founding phase of EMU was the question of how much economic convergence monetary union would require to function properly. The German government emphasized the need for prior economic convergence. Germany envisaged that only a few “euro-ready” states would initially join the monetary union, which would then be expanded step by step. Accordingly, the German Maastricht negotiators insisted on introducing strict, quantitatively defined convergence criteria that EU member states should fulfil before entering the monetary union. The focus here was on low budget debt (see above) and the alignment of inflation rates.

In contrast, the French approach in the euro’s founding phase stated that the common currency had to be supplemented by an economic government so that convergence among its members could emerge over time. In the negotiations, the German and French proposals – each internally consistent – were brought together in an unbalanced compromise: The common currency was introduced almost across the board in the EU member states regardless of whether or not they fulfilled the economic convergence criteria imagined by Germany. Moreover, no institutional and economic policy framework was created that could have promoted the emergence of a more homogeneous economic area once the countries had joined, as was desired by France. It was hoped that a convergence process would begin automatically if a few basic rules were followed. Economic policies remained mainly in the hands of the member states, with the toothless prerogative to treat them as a common concern at the EU level.

The uneasy Maastricht compromise on convergence proved to be fateful in practice. The economic cycles of the euro countries did not converge sufficiently, and the ECB’s single monetary policy could not have a stabilizing effect. The “European Semester” which was introduced in 2011 to better align member states’ economic policies turned out to be a weak coordination mechanism as it left dealing with the European Commission’s recommendations to member states. The ECB policy thus fed a divergence that manifested itself in very different levels of competitiveness across euro area members in the run-up to the euro crisis. Thirty years on, the ECB again faces the uneasy task of maintaining price stability for the entire euro area without being forced to finance weaker, high-debt euro area countries to prevent a new crisis.

3) The (forgotten) geostrategic role for the euro

Early discussions on monetary union highlighted another potential benefit: A common currency could enhance Europe’s influence in international economic relations and could shield it against international exchange rate turbulences, particularly vis-à-vis the United States. France’s main goal during the Maastricht negotiations was to rein in the German Bundesbank. Yet French policymakers were also aware of the international dimension of a monetary union. However, German authorities considered an explicit focus on exchange rate policy vis-à-vis the rest of the world and the creation of an external representation for the euro area as yet another attempt to put the ECB under an unwelcome political influence. Hence, despite general calls for a single voice of the EU at the international level, the Maastricht Treaty was marked by little consideration for the EU’s relations in international financial institutions. The euro came into being effectively without a program or ambition for its international role.

The geopolitical demands of recent years hardly fit with the purely inward focus that guided negotiators during the creation of the euro and the first decade of the common currency. The protracted wrangling among euro members over the details of many a rescue package during the euro crisis can be seen as a further symptom of an EU that has been more concerned with itself than with its external sovereignty and role in world politics. This has clouded the realization that Europe has in fact not kept pace with competitors from China and the USA in important economic sectors of the future. Thirty years after the signing of the Maastricht Treaty that established the euro as one of the keystones of European integration, the changed geopolitical situation should re-open the debate – some of which is long-standing – on how the EU and the euro area can be institutionally strengthened to support economic prosperity and stability for its members at home while at the same time representing European interests in the world.

BIO NOTE

Katharina Gnath is Senior Project Manager at the Bertelsmann Stiftung. She is an expert on European and international economic governance and is in charge of the foundation’s work on the European economy. She and her team recently concluded the project “Repair and Prepare: Strengthening Europe” that outlined a reform agenda for the Eurozone.

The text also appeared on the Bertelsmann Stiftung’s website.