In 1991, the twelve original member countries of the European Union adopted the Maastricht Treaty , also known as The Treaty on European Union You can learn more about the Maastricht Treaty here 1 It established the European Union The Maastricht Treaty, officially known as the Treaty on European Union , marked the beginning of a new stage in the process of creating an ever closer union among the peoples of Europe It laid the foundations for a single currency, the euro, and significantly expanded cooperation between European countries in a number of new areas European citizenship was created, allowing citizens to reside in and move freely between Member States a common foreign and security policy was established closer cooperation between police and the judiciary in criminal matters was agreed The Treaty was signed in the Dutch city of Maastricht, which lies close to the borders with Belgium and Germany It was the result of several years of discussions between governments on deepening European integration 2 It was signed by 12 countries Representatives from 12 countries signed the Treaty on 7 February 1992 Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and the United Kingdom The parliaments in each country then ratified the Treaty, in some cases holding referendums The Maastricht Treaty officially came into force on 1 November 1993 and the European Union was officially established Since then, a further 16 countries have joined the EU and adopted the rules set out in the Maastricht Treaty or in the treaties that followed later 3 It laid the foundations for the euro The Maastricht Treaty paved the way for the creation of a single European currency the euro It was the culmination of several decades of debate on increasing economic cooperation in Europe The Treaty also established the European Central Bank (ECB) and the European System of Central Banks and describes their objectives The main objective for the ECB is tomaintain price stability, i e to safeguard the value of the euro The idea of a single currency for Europe was first proposed in the early 1960s by the European Commission However, an unstable economic landscape in the 1970s meant that the project was brought to a halt European leaders revived the idea of a single currency in 1986 and committed to a three stage transition process in 1989 The Maastricht Treaty formally established these stages Stage 1 (from 1 July 1990 to 31 December 1993) introduction of free movement of capital between Member States Stage 2 (from 1 January 1994 to 31 December 1998) increased cooperation between national central banks and the increased alignment of Member States' economic policies Stage 3 (from 1 January 1999 to today) gradual introduction of the euro together with the implementation of a single monetary policy, for which the ECB is responsible 4 It introduced the criteria that countries must meet to join the euro Along with setting out the timeline for the introduction of the single currency, the Treaty also established rules on how the euro would work in practice This included how to determine if countries were ready to join the euro The purpose of these particular rules, sometimes referred to as the Maastricht criteria or the convergence criteria, is to ensure price stability is maintained in the euro area even when new countries join the currency The rules work to ensure that countries joining are stable in the following areas inflation levels of public debt interest rates exchange rate 5 It was a giant leap forward for European integration Since the signing of the Maastricht Treaty, European countries have grown closer together while some policy areas such as economic and fiscal policies remain at national level European leaders have agreed on additional steps to promote further integration between European states the Stability and Growth Pact was agreed in 1997 to ensure that countries followed sound budgetary policies the European Stability Mechanism was established to provide financial assistance to euro area countries experiencing or threatened by severe financing problems the Single Supervisory Mechanism and the Single Resolution Board were created after the financial crisis to make the European banking system safer, as well as to increase financial integration and stability Today, more than 440 million citizens from 27 Member States enjoy the benefits of European cooperation And 25 years after the roadmap towards the euro was agreed, the euro has become the world's second most traded currency and is part of the daily life of 340 million citizens in 19 countries The Treaty established the European Union created the European Central Bank and the Euro and established the rules for adopting the Euro, also known as the convergence criteria or Maastricht rules For a summary of these rules, please refer to Convergence criteria were put in place to measure progress in countries' preparedness to adopt the euro, and are defined as a set of macroeconomic indicators, which focus on Price stability Soundpublic finances, to ensure they are sustainable Exchange rate stability, to demonstrate that a Member State can manage its economy without recourse to excessive currency fluctuations Long term interest rates, to assess the durability of the convergence The four convergence criteria What is measured Price stabilitySound and sustainable public financesDurability of convergenceExchange rate stabilityHow it is measured Harmonised consumer price inflationGovernment deficit and debtLong term interest rateExchange rate developments in ERM IIConvergence criteria A price performance that is sustainable and average inflation not more than 1 5 percentage points above the rate of the three best performing Member StatesNot under excessive deficit procedure at the time of examinationNot more than 2 percentage points above the rate of the three best performing Member States in terms of price stabilityParticipation in ERM II for at least 2 years without severe tensions, in particular without devaluing against the euro The Treaty also calls for an examination of other factors relevant to economic integration and convergence These additional factors include the integration of markets and the development of the balance of payments Their assessment is also seen as an important indication of whether the integration of a Member State into the euro area would proceed smoothly When is the assessment of the convergence criteria done According to the Treaty, at least once every two years, or at the request of a Member State with a derogation, the Commission and the European Central Bank assess the progress made by the euro area candidate countries and publish their conclusions in respective convergence reports One of the four convergence criteria required countries adopting the Euro to have sound and sustainable public finances , defined as a government deficit that was not higher than 3 of GDP and government debt that was not higher than 60 of GDP (a)What was the purpose of this criterion and how does it benefit the European Union as a whole (Hint think of the impact of lower deficits and public debt levels on the member countries' ability to borrow ) (b)What are the advantages and disadvantages of such a rule Specifically, how can this criterion constrain the behavior of politicians and how does it influence the ability to conduct fiscal policy in response to adverse economic shocks When shocks take place, are they likely to impact all countries equally (c) Some economists have argued that the fixed deficit and debt limits, such as those stipulated by the Maastricht Treaty, must be replaced by flexible ones that are delegated to an independent Public Debt Board that can be put in charge of managing fiscal policy aggregates The Debt Board can be fashioned after the model of the European Central Bank, which oversees the Union's monetary policy Compare this alternative arrangement with the Maastricht Treaty rules and explain whether a Public Debt Board may be an improvement or not Please explain your logic in detail

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In 1991, the twelve original member countries of the European Union adopted the Maastricht Treaty , also known as The Treaty on European Union .

In 1991, the twelve original member countries of the European Union adopted the Maastricht Treaty, also known as The Treaty on European Union. You can learn more about the Maastricht Treaty here:

"1. It established the European Union

The Maastricht Treaty, officially known as theTreaty on European Union, marked the beginning of "a new stage in the process of creating an ever closer union among the peoples of Europe". It laid the foundations for a single currency, the euro, and significantly expanded cooperation between European countries in a number of new areas:

European citizenship was created, allowing citizens to reside in and move freely between Member States
a common foreign and security policy was established
closer cooperation between police and the judiciary in criminal matters was agreed

The Treaty was signed in the Dutch city of Maastricht, which lies close to the borders with Belgium and Germany. It was the result of several years of discussions between governments on deepening European integration.

2. It was signed by 12 countries

Representatives from 12 countries signed the Treaty on 7 February 1992 - Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and the United Kingdom.

The parliaments in each country then ratified the Treaty, in some cases holding referendums. The Maastricht Treaty officially came into force on 1 November 1993 and the European Union was officially established.

Since then, a further 16 countries have joined the EU and adopted the rules set out in the Maastricht Treaty or in the treaties that followed later.

3. It laid the foundations for the euro

The Maastricht Treaty paved the way for the creation of a single European currency - the euro. It was the culmination of several decades of debate on increasing economic cooperation in Europe. The Treaty also established the European Central Bank (ECB) and the European System of Central Banks and describes their objectives. The main objective for the ECB is tomaintain price stability, i.e. to safeguard the value of the euro.

The idea of a single currency for Europe was first proposed in the early 1960s by the European Commission. However, an unstable economic landscape in the 1970s meant that the project was brought to a halt.

European leaders revived the idea of a single currency in 1986 and committed to a three-stage transition process in 1989. The Maastricht Treaty formally established these stages:

Stage 1(from 1 July 1990 to 31 December 1993): introduction of free movement of capital between Member States
Stage 2(from 1 January 1994 to 31 December 1998): increased cooperation between national central banks and the increased alignment of Member States' economic policies
Stage 3(from 1 January 1999 to today): gradual introduction of the euro together with the implementation of a single monetary policy, for which the ECB is responsible

4. It introduced the criteria that countries must meet to join the euro

Along with setting out the timeline for the introduction of the single currency, the Treaty also established rules on how the euro would work in practice. This included how to determine if countries were ready to join the euro.

The purpose of these particular rules, sometimes referred to as the Maastricht criteria or the convergence criteria, is to ensure price stability is maintained in the euro area even when new countries join the currency. The rules work to ensure that countries joining are stable in the following areas:

inflation
levels of public debt
interest rates
exchange rate

5. It was a giant leap forward for European integration

Since the signing of the Maastricht Treaty, European countries have grown closer together while some policy areas such as economic and fiscal policies remain at national level. European leaders have agreed on additional steps to promote further integration between European states:

the Stability and Growth Pact was agreed in 1997 to ensure that countries followed sound budgetary policies
the European Stability Mechanism was established to provide financial assistance to euro area countries experiencing or threatened by severe financing problems
the Single Supervisory Mechanism and the Single Resolution Board were created after the financial crisis to make the European banking system safer, as well as to increase financial integration and stability

Today, more than 440 million citizens from 27 Member States enjoy the benefits of European cooperation. And 25 years after the roadmap towards the euro was agreed, the euro has become the world's second most traded currency and is part of the daily life of 340 million citizens in 19 countries."

The Treaty established the European Union; created the European Central Bank and the Euro; and established the rules for adopting the Euro, also known as the convergence criteria or Maastricht rules. For a summary of these rules, please refer to:

"Convergence criteria were put in place to measure progress in countries' preparedness to adopt the euro, and are defined as a set of macroeconomic indicators, which focus on:

Price stability
Soundpublic finances, to ensure they are sustainable
Exchange-rate stability, to demonstrate that a Member State can manage its economy without recourse to excessive currency fluctuations
Long-term interest rates, to assess the durability of the convergence

The four convergence criteria

What is measured:Price stabilitySound and sustainable public financesDurability of convergenceExchange rate stabilityHow it is measured:Harmonised consumer price inflationGovernment deficit and debtLong-term interest rateExchange rate developments in ERM IIConvergence criteria:A price performance that is sustainable and average inflation not more than 1.5 percentage points above the rate of the three best performing Member StatesNot under excessive deficit procedure at the time of examinationNot more than 2 percentage points above the rate of the three best performing Member States in terms of price stabilityParticipation in ERM II for at least 2 years without severe tensions, in particular without devaluing against the euro

The Treaty also calls for an examination of other factors relevant to economic integration and convergence. These additional factors include the integration of markets and the development of the balance of payments. Their assessment is also seen as an important indication of whether the integration of a Member State into the euro area would proceed smoothly.

When is the assessment of the convergence criteria done?

According to the Treaty, at least once every two years, or at the request of a Member State with a derogation, the Commission and the European Central Bank assess the progress made by the euro-area candidate countries and publish their conclusions in respective convergence reports."

One of the four convergence criteria required countries adopting the Euro to have "sound and sustainable public finances", defined as a government deficit that was not higher than 3% of GDP and government debt that was not higher than 60% of GDP.

(a)What was the purpose of this criterion and how does it benefit the European Union as a whole? (Hint: think of the impact of lower deficits and public debt levels on the member countries' ability to borrow.)

(b)What are the advantages and disadvantages of such a rule? Specifically, how can this criterion constrain the behavior of politicians and how does it influence the ability to conduct fiscal policy in response to adverse economic shocks? When shocks take place, are they likely to impact all countries equally?

(c) Some economists have argued that the fixed deficit and debt limits, such as those stipulated by the Maastricht Treaty, must be replaced by flexible ones that are delegated to an independent "Public Debt Board" that can be put in charge of managing fiscal policy aggregates. The Debt Board can be fashioned after the model of the European Central Bank, which oversees the Union's monetary policy. Compare this alternative arrangement with the Maastricht Treaty rules and explain whether a Public Debt Board may be an improvement or not. Please explain your logic in detail.