Question

5. Membership in the European Monetary Union Suppose that applying for membership in the European Monetary Union (EMU) is expensive, so three hypothetical countries, Imalia, Ispania, and Atlantida, have come to you with their relevant data and want advice on if they should apply to join the EMU. Suppose that the average inflation rate of the three European countries with the lowest inflation rates is 3.0%, and the average long-term interest rate of those countries is 3.2%. Evaluate the characteristics of Imalia, Ispania, and Atlantida presented in the following table using the Maastricht convergence criteria. Then, complete the bottom row by identifying whether each country is eligible to become an EMU member Criteria Imalia Ispania 4.0% 4.5% Atlantida 4.1% 3.0% 5.09 4.0% Inflation Long-term interest rates Exchange rates Budget deficit Debt outstanding Qualifies to enter the EMU? Last devaluated three years ago 2.5% of GDP 47% of GDP Stable 2.2% of GDP 48% of GDP Stable 2.1% of GDP 51% of GDP

Answer 1

The criteria prescribed by Maastricht Convergence Criteria to become the member of EMU is as follows -

1. The inflation rate must not exceed the average inflation rate of the three European countries with lowest inflation rate by more than 1.5%.

The average inflation rate of the three European countries with lowest inflation rates is 3.0%. The table shows that inflation rate of neither of the three prospective member countries exceeds the average inflation rate by 1.5%.

2. The long term interest rate in the prospective member country must not exceed the average long term interest rate of three European countries with lowest long term interest rates by more than 2%.

The average long term interest rate of the three European countries with lowest long term interest rates is 3.2%. The table shows that long term interest rate of the three prospective member countries does not exceed the average long term interest rate by 2%.

3. Exchange rate should be stable with no devaluation with in last two years.

The table shows that exchange rate is stable in prospective member countries with no devaluation in last two years.

4. Budget deficit of the prospective member country should not be greater than 3% of the GDP.

The table shows that budget deficit in each of the prospective member country is below 3% of GDP.

5. Debt outstanding of a prospective member country should not be greater than 60% of GDP.

The table shows that debt outstanding in each of the prospective member country is below 60% of GDP.

This indicates that all the three prospective member countries fulfill the Maastricht Convergence Criteria.

So,

Yes, Ismalia is qualified to enter the EMU.

Yes, Ispania is qualified to enter the EMU.

Yes, Atlandia is qualified to enter the EMU.