Opting Out of Stage 3: Life in the Lower Tier of EMU

In the rapidly expanding literature on economic and monetary union in Europe, the main focus of analysis so far has been the macroeconomic consequences of fixing exchange rates, the costs and benefits to individual participating countries and the economic qualifications required for admission to the final stage (Stage 3). At the same time there is growing acceptance of the view that, even by the terminal date of 1 January 1999 for the start of Stage 3 set down in the Maastricht Treaty, not all the member states of EU will meet the economic convergence criteria and perhaps two (Britain and Denmark) might anyway decline to join such a move. It is rather surprising therefore that more attention has not been given to the implications of a two-tier EMU, in which some countries will have taken that final step to monetary integration while others remain within the current legal and institutional framework of Stage 2. In much of the debate about EMU there seems to be an implicit assumption that the choice for Britain (and Denmark) will be between joining the vanguard of countries in forming a monetary union or opting to stay with the present status quo. But that status quo may well cease: if a significant number of countries were to enter Stage 3 together, the economic and political geography of the EU could radically change and with it the nature of the residual Stage 2 framework.