Recent developments in the financial markets show there is widespread confidence that the single currency union will go ahead as scheduled with a larger than initially expected number of countries participating. In recent months, bond and currency traders have become increasingly upbeat about the prospects for a broad-based Emu in 1999, including weaker EU economies such as Spain and perhaps Italy. Markets have placed a substantial bet on these countries achieving their goal, encouraged by the prospect that, following the announcement of their 1997 budgets, both Italy and Spain could reduce their fiscal deficits to the 3% specified in the Maastricht Treaty. Financial markets already awarded these countries stronger currencies and lower interest rates.
Interest rate convergence in EU bond markets
Interest rates have converged at an astonishing speed in recent months. Within the hard core group, almost complete convergence has already been achieved. The French spread over Bunds fell to zero, while the Dutch spread has been negative for some time. This development is not surprising as for these hard core currencies Emu is already a near certainty.
