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Evidence on EU monetary system

This analysis explores the necessity for member countries in a currency union to have a broad consensus on handling economic shocks. It focuses on the historical relationship between Germany and Italy, particularly in the context of the Maastricht Treaty, which set five convergence criteria to foster a culture of price stability among EU nations. The study looks at key economic indicators, such as inflation rates, and discusses implications for bond markets, especially in light of asymmetries and the fear of integrating inflation-prone countries post-1997.

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Evidence on EU monetary system

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  1. Evidenceon EU monetarysystem

  2. Criterion 5: homogeneous preferences • Currency union member countries must share a wide consensus on the way to deal with shocks. • Germany and Italy: a difficult relationship:

  3. The Maastricht Treaty: fiveentryconditions • A selection process to certify which countries had adopted a ‘culture of price stability’ (i.e., German-style low inflation): countries have to fulfill five convergence criteria: • inflation: not to exceed by more than 1.5 percentage points the average of the 3 lowest inflation rates among EU countries;

  4. The first years (until the Great Crisis) • Asymmetries: some evidence of decrease:

  5. Interpretation of the convergence criteria: inflation • Straightforward fear of allowing in unrepentant inflation-prone countries

  6. The debt and deficit criteria in 1997

  7. Implication for bond markets: the facts

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