Post-maastricht  developments  and developing countries:

The aim of  the European Community,  as  per  the  recommendations  of  the Werner Report of 1972, was the establishment  of a European ~onehny  Unibn  (EMU). The original target date for EMU was  set  in  that Report at  1980, but  the accession  of Denmark, Eire  and  the United Kingdom in 1973 delayed implementation of this goal. As you saw in the preceding Unit 15,  in 1991  the members of the EC  signed the Maastricht Treaty. which declared their intention  to harmonise  their domestic laws and policies as  the European Union.

They also laid down a plan to move towards a monetary union with a single currency and a single  central bank. Most of  the countries  gave up their national currencies and adopted a common currency, the Euro. This means that out of the "impossible trinity",  they gave up independent monetary policies.

Some  guidance on the desirability of forming a monetary union is given by the theory of optimum cumncy  areas. This  branch of economics  is  concerned with the criteria that determine the optimal coverage of a single currency. On the one hand, abolition of national currencies means that there is no exchange rate risk between members, no transactions costs in converting fiom one currency  to another, and greater price transparency because all prices in the union are expressed in a common currency. This facilitates trade and capital investments between  the countries. There is also greater monetary discipline on the central bank. On the other hand, countries will have to give up  their independent monetary and exchange rate policies, which they could use to offset domestic macroeconomic cycles.

If the countries already trade extensively amongst themselves, with large flows of capital  between them, then all the benefits listed above will be greater. Also, if they undergo correlated macroeconomic cycles, then there  is less conflict in policy. Otherwise,  one member country could be  suffering  from  inflation (requiring deflationary monetary policy and currency appreciation) while another suffers from recession (calling for expansionary monetary policy and depreciation). If  labour  is allowed  to move freely between countries, then uncorrelated cycles are less of a problem, because workers cap move from the country with recession to those with expansion.  It is also easier if taxes can be imposed  in  the  expanding region  to  support the workers in  the stagnating region. The EU comes closest to these conditions for a successful monetary union. However,  the Maastricht treaty had to impose on its members certain macroeconomic performance targets  to minimise  the problems discussed above.

Not much work is available in terms of the intricate implications of European monetary integration  and adoption of euro for developing countries. They need to  be  understood  given the  trade and investment relations that different countries or regions in the developing world have. It would also depend upon the  use  of  euro as  a currency of exchange  between  the  EU  and  partner developing countries. It  is in this sense that countries of Latin America and Africa would experience different impact than Asian countries. However, for the Central and Eastern European Countries vis-his  their membership of the EU has been analysed and  studies have highlighted the dilemma  that exists in terms of choosing their exchange rate policies to achieve a combination of low inflation and exchange rate stability while at the same time contemplating a transition towards a peg to euro.