The present chapter, like the previous one, deals with a number of issues which may not be regarded as questions of monetary law in the strictest sense. Nevertheless, a review of those issues is necessary in order to create an understanding of the legal rules and structures which are required to underpin a monetary union. Their importance is underscored by the continuing sovereign debt crisis within the eurozone.
As previously noted, the Treaty on European Union was signed at Maastricht on 7 February 1992. The Treaty dealt with a number of areas in which it was hoped to expand the degree of cooperation amongst Member States, for example, in the fields of foreign and security policy, justice, and home affairs. These are outside the scope of the present discussion.1 In the present context, the Treaty was significant because it brought monetary union to centre stage.2 Article 2 set out the objectives of the Union. The first of these3 was stated to be:
to promote economic and social progress and a high level of employment and to achieve balanced and sustainable development, in particular through the creation of an area without internal frontiers, through the strengthening of economic and social cohesion and through the establishment of economic and monetary union, ultimately including a single currency in accordance with the provisions of this Treaty.
The language reproduced here continues to suggest that a monetary union can come into being before the goal of the single currency is achieved. This is a view which cannot be accepted from a purely legal perspective, in the light of the working definition of a monetary union.4 However that may be, the general theme of Article 2 was carried through in the revisions which, at the same time, were introduced into the EC Treaty itself. Article 2 of that Treaty provided that:
The Community shall have as its task, by establishing a common market and an economic and monetary union … to promote throughout the Community a harmonious and balanced and sustainable development of economic activities … sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance … and social cohesion and solidarity among Member States.
Whilst this specific provision was repealed by the Lisbon Treaty, its essential substance is preserved in Article 3 of the TEU, as currently in force.
In order to achieve these objectives, Article 3 of the EC Treaty required the Member States to adopt ‘an economic policy which is based on the close coordination of Member States’ economic policies … and conducted in accordance with the principle of an open market economy with free competition’. This provision has now been replaced by Article 5 of the TEU, which empowers the Council to adopt guidelines for economic policies and for the coordination of employment and social policies.
The theme is then picked up by Article 119 TFEU, which states that:
(1) For the purposes set out in Article 3 of the Treaty on European Union, the activities of the Member States and the Union shall include, as provided in the Treaties, the adoption of an economic policy which is based on the close coordination of Member States economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.
(2) Concurrently with the foregoing, and as provided in the Treaties and in accordance with the procedures set out therein, these activities shall include a single currency, the euro, and the definition and conduct of a single monetary policy and exchange rate policy, the primary purpose of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union in accordance with the principle of an open market economy with free competition.
(3) These activities of the Member States and the Union shall entail compliance with the following principles: stable process, sound public finances and monetary conditions and a sustainable balance of payments.
It is tempting for the lawyer to view such statements of high policy with a somewhat cynical eye. Yet this temptation must be resisted, for, if questions concerning economic and monetary union fall to be considered by the European Court of Justice, the Court will have to consider the Treaty as a whole and the context in which the disputed provisions appear; it will then interpret and apply those provisions in a manner designed to further their apparent objective.5 Whatever may be the merits of economic and monetary union,6 the Court of Justice would look to these provisions as a guide to the interpretative process. What could the Court legitimately discern from them?
First of all, it is suggested that the Court must conclude from the Treaty provisions noted at paragraph 26.05 that the establishment of a monetary union is in itself a key objective which has been introduced in support of the internal market.7 It is apparent from these provisions that monetary union is intended to provide a catalyst for a high degree of competitiveness and for the convergence of economic performance amongst Member States. It would appear to follow from these provisions that the Treaty rules on the free movement of capital and payments must now be enforced with particular rigour, because any impediment to the movement of capital must ultimately detract both from the internal market and from the effectiveness of the euro as the single currency of the participating Member States. Secondly, and as a necessary corollary, it must follow that those Treaty provisions which provide exemptions in these areas must be narrowly construed, such that they do not materially affect the free flow of funds within the Union.8 It has already been shown that issues of this kind are most likely to arise in the context of capital and payments, partly because the introduction of the euro is most closely associated with that particular freedom.
As explained in Chapter 25, the introduction of a single currency necessarily required a degree of economic convergence amongst the participating Member States; such convergence could only be achieved over a period of time. As a result, the Delors Report recommended a three-stage approach to European Monetary Union (EMU), and this recommendation was adopted when the Treaty on European Union was signed. It is instructive to note that the Treaty thus provided an accelerating momentum towards the ultimate goal of a single currency.
The first stage of economic and monetary union was deemed to have begun on 1 July 1990 and ended on 31 December 1993.9 Since the commencement of stage one pre-dates the Treaty on European Union, it will be apparent that the steps taken during that stage were based on powers which then existed in the EC Treaty—including in particular those provisions introduced by the Single European Act. Stage one thus involved the completion of the internal market and the establishment of procedures to monitor economic conditions and policies.10
The second stage began on 1 January 1994.11 It is unsurprising that matters began to accelerate at this point, partly because the Treaty on European Union had now come into effect, and partly because the introduction of the single currency was, by then, a maximum of five years away.12 This process of acceleration is illustrated by a description of some of the steps which were required to be taken during this period:
(a) Member States were under a continuing obligation to conduct their economic policies with a view to achieving monetary union and other Community objectives. To that end, Member States had to regard their economic policies as a matter of common concern and to continue to coordinate them with the Council.13
(b) Member States were required to treat their exchange rate policy ‘as a matter of common interest’, taking account of experience acquired in the context of the European Monetary System.14
(c) Member States were placed under an obligation to ‘endeavour to avoid’ excessive government deficits.15 Procedures were introduced to monitor such deficits from the beginning of the second stage but, at that time, no sanctions could be applied to an errant Member State.16
(d) At the institutional level, Member States were required to take certain legislative steps to ensure that the independence of their central banks was enshrined within their domestic legal systems.17 Furthermore, the European Monetary Institute (EMI) was established to strengthen the coordination of national monetary policies and to carry out numerous technical and preparatory functions leading up to the beginning of the third stage.18 The EMI was of a transitional character and was effectively the forerunner of the European Central Bank (ECB). The EMI was wound up when the ECB was established and it is thus not now necessary to undertake a detailed examination of the functions of this institution.19
(e) Towards the end of the third stage, the list of Member States which would be included within the eurozone at the outset was identified.20
The third stage of economic and monetary union began on 1 January 1999.21 Only at this point did the single currency of the eurozone come into existence. In the context of a book on the law of money, this aspect necessarily requires detailed consideration and analysis, but it is convenient to deal with the details of the single currency at a later stage.22 For immediate purposes, the primary consequences of the commencement of the third stage were as follows:
(a) the euro became the single currency of the participating Member States—whilst national notes and coins continued to circulate, they were merely subdivisions or representations of the euro itself;
(b) the respective rates at which the former national currencies were to be substituted by the euro were fixed;
(c) the ECB and the European System of Central Banks (ESCB) took up their functions and responsibilities associated with the new currency;23 and
(d) participating Member States became subject to an absolute obligation to avoid excessive government deficits and the terms of the Stability and Growth Pact came into operation.24
Developments within the eurozone thus broadly equated to a ‘monetary union’ within the working definition proposed earlier.25 At this juncture, however, there existed no notes or coins which constituted legal tender throughout the entire eurozone; this was only achieved on 1 January 2002, upon expiry of a three-year transitional period.26
Thus far, occasional references have been made to the fact that Member States had to be selected for participation within the eurozone. The need for the convergence of economic policies as a condition to the creation of that zone has also been noted. It is thus entirely unsurprising that the necessary selection process was governed and determined by tests of an essentially economic character. These tests became generally known as the ‘Maastricht Criteria’, named after the location in which the Treaty on European Union was signed. These criteria and the manner of their application must be summarized briefly.
In essence, it was for the Council (meeting in the composition of Heads of State or Government) to decide whether or not a majority of Member States fulfilled the conditions for participation in the single currency and whether it was appropriate for the Community to move to the third stage.27 The Council was required to undertake this task on the basis of reports from the Commission and the European Monetary Institute on the progress made by Member States in fulfilling their treaty obligations in respect of EMU.28 At a technical level, these reports were to indicate whether Member States had conferred upon their central banks the degree of independence required in order to enable them to participate in the ESCB.29 The remaining criteria attracted a rather greater degree of attention at the time. The reports were required to examine, in relation to each Member State, ‘the achievement of a high degree of sustainable convergence’ by reference to the four criteria set out in the treaty,30 ie:
(1) the achievement of a high degree of price stability—this involved a ‘sustainable’ price performance and an average rate of inflation over the preceding year which is no more than 1.5 per cent in excess of that of the three best performing States;
(2) the sustainability of the government’s financial position—this requirement would be met so long as the relevant Member State was not the subject of an ‘excessive deficit’ determination by the Council at the time when the reports were prepared;31
(3) the observance of the normal fluctuation margins provided for by the Exchange Rate Mechanism (ERM) for at least two years, without devaluing against the currency of another Member State—the ERM and the applicable margins of fluctuation have been discussed earlier;32
(4) the durability of the convergence achieved by the Member State and of its participation in the ERM being reflected in long-term interest rate levels—this was to be tested by reference to the interest rates applicable to long-term government debt issued by the Member State concerned; the rate so achieved should not exceed by more than 2 per cent the corresponding rates of the three best performing Member States.
This is not the place to discuss some of the accounting methods adopted by Member States which proved to be controversial in the context of their attempts to meet the Maastricht Criteria for entry to the third stage.33 Nor is it necessary to observe that several Member States were the subject of ‘excessive deficit’ decisions which had to be revoked in order that this particular criterion could be met or that one Member State (Italy) had not participated in the ERM for a two-year period prior to the preparation of the report. From a purely legal perspective, however, it is only important to highlight a particular drafting point; the assessment of qualification for membership of the eurozone was required to be made ‘by reference to’ the four criteria just discussed34—ie, the Maastricht Criteria provided a starting point for the assessment of process; they did not provide the rigid rules which had to be met in order to gain entry to the eurozone.35 In other words, ‘sustainable convergence’ was the key test for membership; the Maastricht Criteria were essentially guidelines, with all of the scope for flexibility which that term implies. The report and recommendation published by the Commission on 25 March 1998 indicated that eleven Member States fulfilled the criteria necessary to move to the third stage of EMU; Greece did not fulfil those criteria and the United Kingdom, Denmark, and Sweden would not participate by virtue of ‘opt-outs’ or for other reasons.36 No attempt was made to mount a legal challenge either to the report or the recommendation, and indeed it appears that any such challenge would necessarily have failed.37 Nor was any successful attempt made to challenge subsequent Council Regulations made in relation to the single currency,38 and, once again, it is difficult to identify any basis upon which such a challenge might have succeeded.