EVALUATING THE EMU CRITERIA - THEORETICAL CONSTRUCTS, MEMBER COMPLIANCE AND EMPIRICAL TESTING

European monetary union, planned for January 1 1999, requires EU membe rs to fulfil five criteria. Theoretical support for these five criteri a is, at best, weak, and empirical tests have nut been attempted. This study addresses itself to that gap. It reviews the theory, investigat es the extent to which EU members meet the requirements and tests the criteria empirically. It assesses whether the EMU criteria, as proxied , are indicators of exchange rate stability. Results are not supportiv e: the model is clearly mis-specified. The best results obtained sugge st, if anything, that the debt criterion has no role to play, and that , contrary to the specified criteria, high inflation differentials and high budget deficit/GDP ratios are more consistent with exchange rate stability. We conclude that the empirical results confirm the theoret ical weakness of the criteria. to a fixed exchange rate or single curr ency.