Eurozone Maastricht Treaty
Euro zone Treaty
The European Community established the convergence criteria. These criteria was established in order to allow its EU Member states to take part in the Euro Zone, and using the Euro, as an official currency. The members of the European Union formed the Maastricht Treaty in 1992. The principle goals of the treaty were to establish an economic and monetary union, strengthen the democratic legitimacy of its institutions, better the effectiveness of its institutions, come up with the community social dimension, and also establish a unified foreign and security policy (Charles 1998).
The criteria contain several principles governing inflation rates, government finance, exchange rate, and long-term interest rates. The percentage points for inflation rates should not be 1.5 higher than the average the top three members states in performance of the EU. Government finance covers both the annual government deficit and the government debt. Under the annual government deficit, the criteria talks about the proportion of annual government deficit to gross domestic product (GDP). This proportion, at the close of the leading fiscal year, must not get past 3%. It can, however, reach close to 3%, and it is only exceptional and temporary excesses that can be granted for such case of exceptionality (David 1999).
The criteria discuss the government debt under terms that the proportion of the gross government debt to GDP, at the close of the leading fiscal year, must not go beyond 60%. If specific conditions make this unachievable, then the proportion must have significantly reduced at a satisfactory pace to approaching the reference value. For applicant countries, they must have joined, for two consecutive years, the exchange-rate mechanism (ERM II) as set in European Monetary System (EMS). Also, during this period, the applicant country must not have devalued its currency. In the case of long-term interest rates, the criteria holds they must not go exceed the last three inflation member states by 2 percentage points (Emil 2009).
In March 2005, the Maastricht criterion was flexed more, under the great influence of Germany and France. This was for the purpose of taking into consideration both the economic and structural reforms. Thus, this paved way for authorization of exceptional and temporary excesses.
The European Central Bank (ECB) was created in June 1988. The currency rates for the 11 member states were fixed and the euro got brought in as the single currency. In 2001, Greece joined the euro area, Slovenia joined as the 13th member in January 2007, Cyprus and Malta joined in January 2008, and Slovakia on January 2009. The inflation convergence and introduction of single inflation targeting across Eurozone have encouraged investors to have homogenous inflation expectations across core and periphery and drove the borrowing yields down.
Current interest rates
Fiscal deficit deterioration
The fully-fledged forecast in May 2011 has led to deterioration of euro area. The extensive debt crisis has reduced confidence affecting investment, and consumption. The worsening environment in economic has discouraged exports. If these trends continue for several quarters, it will greatly affect the prospects of growth. The first and initial GDP improvement signs are anticipated for the second half of 2012. However, this recovery is anticipated to have limited effect on job creation (Charles 1998).
No economic growth is awaited in the current and coming quarters. Therefore, GDP is forecast to improve at a rate of 1/2% in the EU, and the euro zone in 2012. While rates of economic growth will vary across the Union, groups of countries will not be affected by the slowdown.
Extended doubt in financial markets pertaining to public finances' sustainability in some euro area economies, as well as, fears of infection affecting the core euro area countries will lead to inhibited growth. The global weakness the economy, even some of the most crucial partners for the EU, will strengthen this trend. The estimates assume that confidence will bit by bit get back in the second half of 2012.
Inflation is required to fall below 2% in 2012. This has resulted from the lessening pressure from energy prices. The subdued economic activities and increases in wages are meant to hold inflation in check in the course of the forecast period. The detrimental impact of the common currency can be witness in several scenes. For instance Britain has the following features: a lower degree of unfunded pensions; a larger volume of high tech exports; a business more orientated to services; an economy whose income from overseas...
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