The Implications of EMU for IMF Surveillance

• Author: Michael C. Deppler
• Position: Director of the IMF's European I Department

How will EMU affect the way the IMF monitors economic developments in its European members?

The third and final stage of European Economic and Monetary Union (EMU) is set to begin on January 1, 1999, with the establishment of a currency union encompassing 11 of the European Union's 15 member countries-Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. On that date, these countries will lock their exchange rates; the euro, their common currency, will be born; and national authorities will hand over responsibility for monetary and exchange rate policies to area-wide institutions. With the economic size of the initial euro area rivaling that of the United States, EMU will represent an important milestone for both the European Union and the international monetary system.

EMU will have important implications for the IMF's work and procedures, including the IMF's "surveillance" activities-that is, its regular monitoring of economic policies and developments in member countries. The IMF has a mandate, under Article IV, Section 3 of its Articles of Agreement, to oversee the international monetary system and, to that end, to exercise firm surveillance over members' exchange rate policies. Regular consultations with members-known as Article IV consultations-represent the main vehicle for IMF surveillance. They are supplemented by periodic multilateral surveillance exercises, including those conducted in connection with the IMF's World Economic Outlook, which normally appears twice a year, and its annual International Capital Markets report. In addition, the IMF addresses issues from a regional perspective, whenever appropriate.

Although EMU represents a major change for the international monetary system, it has evolved gradually, giving the IMF time to adapt its practices. The IMF's Executive Board has met regularly to consider the EMU process as a whole, and EMU-related matters have become increasingly prominent in Article IV consultations with individual countries. Moreover, since the signing of the Maastricht Treaty in 1992, contacts between IMF staff and institutions in the European Union have multiplied as the latter has expanded its surveillance over the economic policies of its member states and the convergence criteria established by the treaty have played a growing role in policy formulation by national authorities. EMU issues have also featured prominently in the IMF's global...