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. Supplyside
reform means introducing the profit motive and deregulation, and allowing the price
system to work. Because prices had been artificially low, there were initially 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 negotiations 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.
