The Launch of the Euro and Economic Performance

Abstract

We start by examining the formation of the Economic and Monetary Union (EMU), considering the ‘convergence criteria’ which in principle determine whether a European Union (EU) country could and should join the euro. These ‘convergence criteria’ continue to be applicable to potential members of EMU, though our focus here is on the application of those criteria to the initial membership of EMU. It is argued that there were some notable omissions from the criteria applied, and those omissions in effect stored up problems for the euro area, which came to prominence in the years after the financial crisis of the late 2000s.¹ This is followed by an overview of the macroeconomic performance in the euro area, which it is argued could be labelled lacklustre in the period preceding the financial crisis. In this overview we also point to the differences between the countries of the EMU, particularly with regard to inflation, competitiveness and the current account position, and indicate how those differences contributed significantly to the euro crisis.