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ABSTRACTThis paper contributes to the ongoing debate over European Monetary Union (EMU), reviewing the economics literature on the merits of a single currency ('optimum currency area') and on the requirements for astable currency ('credibility'). To understand Europe's drive for EMU and the transition strategy adopted at Maastricht both issues must be analysed together. The controversial convergence criteria in the Maastricht Treaty, in particular, primarily address valid concerns about the (price) stability performance of a future single currency by determining the timing and membership of EMU. In general, we propose to interpret the Maastricht design as a mechanism that must reconcile conflicting interests, solve credibility problems over time and extract information about candidate countries' 'stability culture' in the run-up to monetary union.

The 'Stability Pact' agreed at the Dublin Summit in December 1996 and concluded at the Amsterdam European Council in June 1997 prescribes sanctions for countries that breach the Maastricht deficit ceiling in stage three of European Monetary Union. This paper explores the central provisions and possible motivations of the Stability Pact as an incentive device for fiscal discipline and as a partial substitute for policy coordination and a common 'stability culture'.