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The second stage of the EMU
Although the first stage in the process began on 1 July 1990 with the complete liberalisation of capital movements between Member States, the entry into force of the Treaty on European Union on 1 November 1993 marked the genuine starting-point of preparations for Economic and Monetary Union (EMU).
In accordance with the Treaty, the second stage began on 1 January 1994 with, in particular, establishment of the European Monetary Institute (EMI), based at Frankfurt am Main. The tasks of the EMI were twofold:
- strengthening cooperation between the national central banks and the coordination of Member States' monetary policies (during this stage, monetary policy remains in the hands of the national authorities);
- carrying out the necessary preparatory work for establishment of the European System of Central Banks (ESCB), which is to conduct the single monetary policy from the beginning of the third stage, and for introduction of the single currency.
During the second stage, Member States must ensure that their national law is compatible with the Treaty and with the Statute of the ESCB, with special reference to independence of their national central bank. They must also make significant progress towards convergence of their economies, since the move to the third stage is conditional on fulfilment of the four convergence criteria laid down in the Treaty. The Commission established annual reports on the state of convergence between Memeber States
The monetary turmoil experienced in 1995, largely caused by the slide in the value of the dollar, in fact strengthened the Member States' political determination to go ahead with EMU. That determination took shape at the Madrid European Council of 15 and 16 December 1995, which confirmed that the third stage of Economic and Monetary Union was to go ahead on 1 January 1999 in accordance with the convergence criteria, the timetable, the protocols and the procedures laid down in the Treaty. On the basis of the discussions initiated by the Commission's Green Paper, the fifteen Heads of State or Government spelled out the scenario and the timetable for introducing the single currency, which they decided to call the euro.
Rounding off two years of intensive work by all the EU institutions, the Dublin European Council of 13 and 14 December 1996 noted that there was political agreement on all the necessary foundations for setting the single currency in place:
- the legal framework for the use of the euro;
- the Stability and Growth Pact for ensuring strict budgetary discipline;
- the structure of the new Exchange-Rate Mechanism for those Member States not joining the euro zone.
At the same time the EMI presented the designs of the banknotes that will be put into circulation from 1 January 2002. The euro has now become a tangible reality for the general public.
Throughout 1996 and 1997 the economic upturn, against a background of closer nominal convergence, interest and inflation rates at exceptionally low levels, and stable exchange rates (the Finnish markka joined the EMS Exchange-Rate Mechanism in October 1996 and the Italian lira returned to the ERM in November), enabled there to be a general improvement in the state of public finances, paving the way for the majority of Member States to switch to the euro in 1999.