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The Optimum Currency Area and the Credibility of Maastricht Criteria

European Union (EU) countries, when accessing European Monetary Union (EMU) should meet the Maastricht criteria considering the price stability, stability of long-term interest rates, government deficit, public debt and exchange rate stability. The Maastricht Treaty was signed on 07th December 1992, in the first stage of EMU creation, and it was set as a precondition for any EU country who decided to become a member of the European Monetary Union and adopt the euro as its national currency. Criteria were set to ensure a greater degree of optimality of monetary union, in order to implement the common monetary policy that will suit all members of the EMU. The third phase of European Monetary Union started on 1st January 1999, with initial eleven members. Meanwhile the number of members grew to 17. This paper reviews the main characteristics of optimum currency area (OCA) theory, which was created by Robert Mundell in 1961. Furthermore, it points out the advantages, but also disadvantages of entering the currency area. The paper also endeavours to review researches considering the level optimality of euro area. In addition, it has intention to examine the credibility of the established Maastricht criteria and to determine whether individual members violated certain criteria i.e. whether the nominal convergence changed to nominal divergence. Finally, using logistic regression, paper establishes whether the Maastricht criteria can be used as features by which one can distinguish EMU member states from non-EMU states i.e. to determine whether the likelihood that the country belongs to EMU is increased, if it meets the Maastricht criteria. Required data are generated from World Bank databases, International Monetary Fund database and from EUROSTAT. The paper concludes that EMU is not an OCA, although the rate of real convergence partially has increased. Moreover, it is shown that Maastricht criteria have lost their credibility and that EMU members, while they were nominally converging before entering euro area, have diverged once they have joined it. This conclusion has intention to question the meaning of Maastricht criteria, to emphasize the need for reconsidering them and to show that some countries outside EMU would be more consistent members than existing ones.

Optimum currency area; Maastricht criteria; credibility; EMU

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