Euro Adoption and Maastricht Criteria: Rules or Discretion?

Abstract

In connection with the prospective euro adoption by the new EU members, the issue of how strictly to enforce the Maastricht criteria for joining the European Economic and Monetary Union (EMU) has been discussed for some time. Arguments have been made in favor of a more flexible interpretation of some Maastricht criteria to take into account the specific conditions of the new member states (NMS). This paper makes a case for a more flexible interpretation of the Maastricht inflation criterion and proposes a different specification. Further, it examines the compatibility of inflation and exchange rate Maastricht targets and argues that under the specific circumstances of euro adoption, and taking into account the way these targets are defined, meeting both of them during a limited period of time should not pose a problem. Finally, the paper argues that both for short-term cyclical and long-term sustainability reasons, the NMS may aim at somewhat more ambitious fiscal targets before euro adoption than required by the Maastricht fiscal criteria.

Keywords: European Economic and Monetary Union, Maastricht criteria, Euro adoption, Policy rules, ERMII, Inflation target, Fiscal deficit, Public debt, Interest rate convergence

JEL Classification: F33, F36, F53