Bolstered by the successful operations of the ERM – parities had almost remained unchanged for 5 years from early 1987, the EC started considering a major structured change, namely Economic and Monetary Union, or a single currency for all EC countries, far reaching proposals on transition to a single currency were adopted at a summit meeting of the EC heads of government held in Maastricht in the Netherlands in Dec. 1991.
The proposals envisaged achievement of monetary union in three stages. Stage I began on 1 st July, 1990 (i.e. even before Maastricht) with the free movement of capital in EC. Stage II began in 1 st January, 1994 and envisaged the establishment of a European Monetary Institute (Precursor to the eventual formation of a European System of Central Banks). Over
stages I & II, member governments would seek to achieve greater convergence of their economies under designated criteria, inflation, interest rate, exchange rate stability within the ERM, and the sustainability of the fiscal balance. At the start of Stage III (earliest in 1997 but not later than January 1 st, 1999), member States, which would meet the convergence criteria, would irrevocably fix inter se exchange rates and proceed towards a single currency. Other members should join later as and when they meet the criteria under Maastricht, the U.K. has retained the right not to join the monetary union.