The Single European Act committed EU governments to a Single
Market by 1992. The principles were common, broad outlines for regulation,
national implementation, and mutual recognition of firms licensed by other
member states.
For many countries this meant substantial deregulation. Together with enlarged
market size, this increased competition.
The main winners were the small southern countries of the EU, who had relatively
cheap labour and scope for scale economies. However, even the large, rich
EU countries benefited.
A monetary union means permanently fixed exchange rates,
free capital movements and a single interest rate.
In abolishing capital controls before 1992, the ERM had already harmonized
monetary policy, under German leadership. The UK became an ERM member in 1990,
but left in 1992.
The Maastricht criteria say that EMU entrants, including
future ones, must have shown low inflation, low interest rates and stable
nominal exchange rates before entry, and must have budget deficits and government
debt under control.
EMU members must continue to obey the Stability Pact,
which fines countries for excessive budget deficits, except if they are in
recession.
In EMU, a country's competitiveness can change through the slow process
of domestic wage and price adjustment. Without a federal fiscal system,
individual member states may want to keep control of fiscal policy to deal
with crises.
Transition economies in Central and Eastern Europe have
begun economic reform. Supply-side reform means introducing the profit motive
and deregulation, and allowing the price system to work. Because prices had
been artificially low, initially there were sharp rises in prices. Tight macroeconomic
policy managed to stop this turning into hyperinflation and to reduce inflation
steadily thereafter.
Output fell sharply in CEE in 1990–92. The Soviet market collapsed,
banks were unable to monitor and enforce credit agreements, there was little
corporate control and vital infrastructure for a market economy was lacking.
Most CEE countries resumed growth during 1993–94 and may keep growing
rapidly if sensible policies are maintained.
Most CEE countries are at advanced stages of negotiation for EU entry.
They will have to prove they can survive in the Single Market without disrupting
existing EU members. They will have to join ERM2 and will be allowed to adopt
the euro only after they fulfil the Maastricht criteria.
