The Maastricht Criteria and the Euro: Has the Convergence Continued?

Abstract

We analyze the performance of the Maastricht convergence criteria (inflation, long-term interest rate, annual and overall public debt to GDP) of the European Monetary Union (EMU) that led to the introduction of the Euro on Jan. 1 st 1999 as book currency. For our analysis we define 3 regimes: a) the Maastricht regime from 1992-97 starting from the year when the EMU was established, b) the Amsterdam regime 1997-1999 which is based on the Pact of Stability and Growth (PSG), decided by the EU in 1997 in Amsterdam and c) the Euroland regime 2000-2001, after the introduction of the Euro as book currency. The convergence process is analysed with respect to these 3 regimes, and we test also for a smooth or a rough transition between these 3 regimes. Given the regimes, we test the convergence in econometric models to see if the first and second moments of the convergence process are time dependent. Furthermore we can check if there was a smooth transition process between the regimes and if the convergence process has stabilized around a target path. We find that the speed of the convergence processes for the monetary authority controlled variables inflation and interest rates was rather impressive and very different from the government controlled variables annual deficit and the public debt.