Destructive Diversity, Inflationary Convergence and the Inflation Criterion

Destructive Diversity, Inflationary Convergence and the Inflation Criterion: The Way to EMU Reconsidered

Since the signing of the Maastricht Treaty, there has been an intensive discussion whether the convergence criteria incorporated into the contract were appropriate to prepare the EU-member-countries for European Monetary Union. We argue that at least inflationary convergence was not a necessary precondition for EMU. This paper aims at analyzing the effects of the inflation criterion with regard to its possible influence on welfare of the EU-member-states during the transitional phase (stage II). It is shown that the inflation criterion can be interpreted as a component of an incentive compatible contract; insofar it has contributed to a decrease in inflation bias during stage II of EMU but played no important role with respect to stage III.