Maastricht Treaty

What Is The Maastricht Treaty?

The Maastricht Treaty was the international agreement responsible for creating the European Union (EU). It was signed on 28th February 1992 by 12 members in the city of Maastricht, Netherlands, and came into effect on 1st November 1993.

The agreement led to a formation of a political and economic bloc between the 12 nations. It led to greater cooperation between the nations while promoting unified citizenship and economic and social growth. It also led to the use of a single currency, the Euro. 

The primary purpose was to foster economic cooperation by establishing a free economic zone among the members of the European Union. While the original members were only 12, the Treaty has been amended many times, and as of October 2021, there are 27 members of the European Union. 

However, this Treaty was not just responsible for reforming the overall structure of the European Union and strengthening the cooperation between the countries but also was a major enabler for stabilizing political tensions within Europe at the end of the Cold war. 

Understanding the Maastricht Treaty

The Treaty was signed in February 1992 by the representatives of the 12 members of the European Community or the EC: Belgium, Denmark, France, Germany, Greece, Italy, Ireland, Luxembourg, Netherlands, Portugal, Spain, The United Kingdom & Northern Ireland. 

The Treaty was signed and drafted to establish common European citizenship and allow the residents to move freely between the states. This would enable them to work and live wherever they wanted and lead to shared economic, foreign, and security policy. 

The Treaty also set the official timeline for the creation of the European Economic and Monetary Union, which included a common monetary union, a central banking system, and a common currency.  

These steps were to be introduced in 3 stages:

• Stage 1 (July 1990 - December 1993): Free movement of capital amongst all the treaty members.

• Stage 2 (January 1994 - December 1998): Cooperation between the treaty signees and the national bank members. 

• Stage 3 (January 1999 onwards): Gradually introducing the Euro and moving towards a regime with a single monetary policy. 

The Treaty also laid down the significant criteria for joining and becoming a member of the European Union. It ensured that the member nations had relatively stable interest rates, inflation rates, exchange rates, and public debt. 

Effects of the Maastricht Treaty

Every member of a member state was given European Union citizenship by the Treaty, enabling them to run for local office and European Parliament elections in the European Union nation where they resided regardless of nationality.

The Treaty proposed three main changes centered on European communities, Justice and Home Affairs, and standard foreign and security policy. These helped the EU to develop new policies which helped serve and protect the people.  

This helped to make the European Union more accountable, transparent, inclusive, and effective. 

The accord established the central banking system through a common economic and monetary union. As a result, maintaining price stability was the European Central Bank's primary goal, ultimately preserving the Euro's value. 

The free flow of capital between the member states was the first step in this process, which paved the way for more coordination between national central banks and more significant economic policy alignment among the states. The launch of the Euro was the last action.

Greater policy cooperation and coordination was one of the main objectives. Accordingly, the countries sought to improve coordination and collaboration in many sectors, including the environment, law enforcement, and social policy.

The Euro enabled more choice and stable prices, greater business opportunities, improved stability and growth, and more closely integrated financial markets. 

Special Considerations

The Maastricht Treaty has been amended several times since its signing. Some of the amendments made since then are as follows: 

• Some of the social protection clauses in the original Treaty were expanded upon by the Treaty of Amsterdam in 1997, notably those addressing sex discrimination, asylum seekers and immigration, and housing and working circumstances.

• To accommodate additional member states, the Treaty of Maastricht was amended by the Treaty of Nice, which became effective in February 2003. 

This pact granted the Commission's president additional freedom from the governments of the member states. Additionally, the requirement for national vetoes gave member states more authority to integrate policies in several sectors.

• The Treaty of Lisbon did not create new treaties but revised existing ones. It also enhanced the union's representation in foreign affairs and gave the Commission, parliament, and judiciary more authority. After two years of voting among member nations, it became effective in December 2009.

• After a referendum known as Brexit, the United Kingdom decided to leave the European Union. It officially withdrew on January 31, 2020.

The European Monetary Union

The major objective of the European Monetary System, which was established in 1979, was to advance monetary stability among all its member countries. Later, the European Monetary Union (EMU) was established to make the dream a reality, specifically with a single currency.

The Maastricht Treaty outlined several requirements that each member state must meet for the agreement to be fulfilled. First, they had to consider the issues with the differences in the member nations' actual exchange rate convergences and, more critically, their various fiscal imbalances. 

Thus, the following objectives were established for the convergence of the economies.

1. Price Stability

Any member state's inflation rate cannot be higher than the three nations in the region with the lowest inflation rates by a predetermined variable inflation rate. A 1.5% inflation rate, as determined by the Consumer Price Index, was the fixed variable.

2. Reasonable and responsible interest rates

The average inflation rates in the three countries with the lowest inflation rates in the region cannot be exceeded by any state's long-term interest rates by a predetermined amount. Therefore, the factor had a 2% setting.

3. Public finance that is sustainable and ethical

Each member state's overall budget deficit is restricted to no more than 3% of GDP. In addition, the country's total government debt cannot exceed 60% of its GDP.

It was significant because sovereign governments continued to have fiscal policy autonomy despite the ECB taking control of monetary policy in member states.

4. Consistent currency rates

The typical fluctuation margin must be maintained for all member state's currencies. A central banking system, a shared monetary and economic union, and a single currency were all created as a result of the creation of the EMU.

The ECB was established in 1998. It means that before the Euro went into circulation in 2002, the exchange rates between the national currencies of the member states were set. The ECB's primary objective is to preserve the area's price stability and protect the Euro's value.

The creation of the eurozone resulted in greater collaboration between its members because it allowed the free flow of capital. Additionally, it improved coordination between the ECB, which now directs monetary policy for all members, and the central banks of the member states.

Researched and authored by Soumil De | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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