Large-scale EMU: the May Council decisions and implications for monetary policy

The decision by the EU Council of Heads of State or of Government at the beginning of May, that eleven Member States would form an Economic and Monetary Union on 1 January 1999, occasioned little surprise: financial markets and economic commentators had become increasingly convinced over the preceding months that EMU would start on time with a membership extending beyond the six ‘core’ countries—France, Germany, the Benelux countries and Austria—to include also Finland, Ireland, Italy, Portugal and Spain. What was not widely expected was that the ECOFIN and HoSoG Councils on 1–2 May appear to have spent little time debating the economic case for including each of the eleven countries but to have been preoccupied instead with a heated political row about who should be appointed President of the European Central Bank.This note assesses the possible consequences that this cavalier approach to the vital question of membership of monetary union might have for the conduct of policy in Stage 3 and the future viability of EMU. It examines the economic evidence that had been presented to the Councils to see whether their judgement that the economies of all eleven countries are sufficiently convergent is warranted. It also considers whether the unseemly compromise through which the dispute about the ECB Presidency was resolved will prejudice the political independence of the ECB in its conduct of monetary policy.