Maastricht Treaty

International agreement that led to the formation of the European Union

What is the Maastricht Treaty?

The Treaty of the European Union (EU), which is commonly known as the Maastricht Treaty, is the international agreement that led to the formation of the European Union. The treaty was signed in 1991 by 12 member states and became effective in 1993.

 

Maastricht Treaty

 

The EU is essentially a political and economic bloc. The political aims broadly include shared European citizenship and the upholding of liberal democratic values. The economic aims broadly include the establishment of a free trade zone and an economic cooperation zone.

 

Summary

  • The Treaty of the European Union (EU), which is commonly known as the Maastricht Treaty, is the international agreement that led to the formation of the European Union.
  • The treaty set forth certain criteria to be followed by all member states for the fulfillment of the goals of a political and economic union.

 

EU Membership

The Maastricht Treaty required each member state to vote to approve the formation of the European Union. It was signed into effect on February 7, 1992, and it’s been amended with several other treaties that dictate the functioning of the European Union over the years.

The original twelve member states of the EU were West Germany, Denmark, Ireland, Belgium, Italy, Luxembourg, France, Netherlands, United Kingdom, Greece, Portugal, and Spain. As of 2020, the European Union lists a total of 28 members.

The Euro is the official currency of 19 countries in the European Union. It means that the European Central Bank (ECB) sets the monetary policy and print the single common currency for the member countries.

Once the EU was formed, every national of each of the member states was granted citizenship of the European Union. It meant the freedom of movement, residence, and the right to contest in local and EU elections.

 

The European Monetary Union

The European Monetary System, which was created in 1979, aimed to promote monetary stability among all its member nations as its primary goal. Later on, the creation of the European Monetary Union (EMU), aimed to solidify the goal into a reality, especially with a common currency.

The Maastricht Treaty set forth certain criteria to be followed by all member states for the fulfillment of the same. They needed to consider the problems of the disparities among real exchange rate convergences of the member states, and more importantly, the difference in fiscal imbalances of the members. Thus, for the convergence of the economies, the following goals were set.

 

1. Price stability

The inflation rate of any member state cannot exceed by a set variable inflation rate of the three countries with the lowest inflation rates in the region. The set variable was an inflation rate of 1.5% as measured by the Consumer Price Index.

 

2. Reasonable and responsible interest rates

The long-term interest rates of each state cannot exceed by a set variable, the average inflation levels in the three countries with the lowest inflation levels in the region. The variable was set to 2%.

 

3. Sustainable and responsible public finance

The general budget deficit of each member state may not exceed more than 3% of the gross domestic product. Moreover, the total government debt of the country must not exceed 60% of the gross domestic product.

It was important because even though the ECB would take hold of monetary policy in member states, sovereign states would still be autonomous in relation to fiscal policy.

 

4.Stable exchange rates

The currencies of all member states must remain in the normal fluctuation margin.

 

The formation of the EMU created a common monetary and economic union, a central banking system, and gave its members a common currency.

In 1998, the ECB was created. It means that the conversion rates between the currencies of member states were fixed as a prelude to the euro, which began circulating in 2002. The main aim of the ECB is to maintain price stability in the region, i.e., to safeguard the euro’s value.

The formation of the eurozone led to increased cooperation between member states as it enabled the free movement of capital. It also led to increased cooperation between the central banks of member states and the ECB, which now dictates monetary policy to all members.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Eurozone
  • European Central Bank
  • Fiscal Policy
  • Economic Union

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!