One of the major issues confronting the European Union is the precise membership of the future economic and monetary union (EMU). In 1998, a decision will have to be made about who will be in, and who will be out of, EMU. At a lunchtime meeting, jointly organized by CEPR and ECARE on 27 November 1996, Paul De Grauwe (Katholieke Universiteit Leuven and CEPR) claimed that the consensus seemed to be that if EMU starts at all in 1999, it will consist of a core group of countries forming a mini-currency union.

This consensus was reflected in the financial markets in two significant ways. First, the spreads between the long-run forward interest rates in Deutschmarks, French and Belgian francs, guilders and Austrian shillings had all but disappeared, indicating that the market believed these currencies would form one currency union after 1999. Second, despite recent declines, the other EU forward interest rates had continued to be significantly higher than those of the core group, suggesting that the market had doubts about the entry of these other currencies into the union in 1999.

De Grauwe argued that the Maastricht approach to monetary union would lead to several problems. First, the convergence criteria might keep some countries outside the union. In particular, countries with a poor reputation for their management of inflation and public finances might find it difficult to converge to the performances necessary to join EMU. Consequently, there was a risk that they would be excluded against their wishes for a long period of time. Some of these countries are very much convinced that they belong to the EU optimum currency area.

Such circumstances could create a second crucial political problem at the moment in early 1998 when the decision about membership of EMU has to be made. Under Article 109j 4 of the Maastricht Treaty, this decision in respect of each country will be made by qualified majority voting. Three or four countries will therefore be capable of forming a blocking minority, so creating wide scope for coalition-building by the ‘losers’ in this Maastricht game.

In short, the countries commonly considered to be the hard core – Austria, Benelux, France, Germany and Ireland – will each need the approval of the losers, who could form various coalitions to block the entry of one or more of the core countries. The question then is whether there will be objective grounds for the losers to exert their negative voting power. According to De Grauwe, the answer is probably yes.

A third potential problem stems from the increasing probability that one or more of the hard core countries will not satisfy one or more of the Maastricht criteria. France and Germany, for example, were finding it very difficult to bring their government budget deficits down to the norm of 3% of GDP. The debt-to-GDP ratio represented an even more serious problem for Belgium, the Netherlands and Austria.

Thus, the losers will have a strong legal basis to claim that some of the hard core countries do not satisfy one or other Maastricht criterion. To let these core countries pass the Maastricht ‘entrance exam’, it would be necessary to apply sufficient flexibility in the interpretation of the convergence criteria. This would open the door for the losers to insist they are given similar treatment.

De Grauwe concluded that the mini-currency union scenario that many observers, including the financial markets, seemed to take seriously was very unrealistic. This outcome would almost certainly be blocked by the countries barred from entry, and they would have good legal and economic grounds to do so. The choice the EU countries would face in 1999, therefore, would be to start a maxi-currency union, which would allow the entry of the South European countries, or to postpone the union. The way this choice was made would depend crucially on the attitude of Germany, but major political conflicts now seemed increasingly likely.