Does Italy's plight threaten European Monetary Union?

The Italian economy is in a mess. GDP is expected to contract by 0.6% this year and the budget deficit is heading towards 4% of GDP – it is hard to see a way out of the mire. And after the rejection of the European constitution in France and the Netherlands, questions are being asked about the very future of the European project. With Italy fundamentally uncompetitive across a whole range of both price and non‐prices measures, and with an industrial structure ill‐equipped to deal with the challenges of globalisation, Italy's long‐term membership of the Euro is being debated. This article by Keith Church sets out Italy's problems and argues that, if the economy stagnates for a prolonged period, pressure to leave EMU will become irresistible. This can be avoided if the government finally implements structural reforms instead of continually ‘muddling through’. At the same time, the ECB needs to realise the urgency of the current situation and start to show greater flexibility.     

欧洲货币一体化中的财政约束研究——基于价格水平的财政理论(FTPL)视角

随着目前欧元区财政经济状况的整体恶化,稳定与增长的矛盾凸显,欧盟《稳定与增长公约》框架下的财政约束条款再度引发诸多争议。基于价格水平的财政理论(FTPL)视角,本文试图论证为实现欧元区物价稳定和欧元汇率稳定的双重目的,欧盟《稳定与增长公约》框架下的财政约束有其必要性。     

From European Union to European Monetary Union: the new member states and accession countries of Central and Eastern Europe in 2004

The 10 new member states and candidate countries from Central and Eastern Europe have made the institutional reforms embodied in the acquis communautaire, including developing institutions of social dialogue which are supposed to ease the path to entry into the European Monetary Union (EMU). This review assesses the challenges facing the Central and Eastern European countries in achieving the targets set for EMU entry and questions whether the existing institutions of social dialogue will be able to bear the strain of achieving those targets.     

The ins and outs of European Monetary Union: some public policy issues

This paper reviews the problems, other than the foregone benefits of EMU, that would face countries-either EU members or non-members closely associated with the EU-as a consequence of staying outside EMU.
Problems both economic and political are discussed, but the primary focus is on economic issues.
It is concluded that there may be minor adverse consequences; but they are only a possibility.
What is clear is that claims that there will inevitably be major adverse consequences - higher inflation or interest rates, or lower growth, for example - are entirely without foundation.     

Monetary Union or International Monetary Order?

Is European Monetary Union desirable? Pascal Salin, of the Univeristy of Paris, argues that any system of fixed exchange rates such as the EMS Exchange Rate Mechanism, is likely to prove unsatisfactory.     

The European Monetary Union break-up: an economic experiment on the return of the deutsche mark

By using the macro-econometric input–output model INFORGE, this paper investigates the economic effects of a unilateral break-up of Germany from the European Monetary Union (EMU). The results show that a return to a national currency lowers Germany's growth path. Positive effects of a break-up due to lower domestic prices, increasing real wages and lower imports are fully compensated by the loss in international competitiveness. On industrial level, the negative implications are the strongest in those industries that depend strongly on exports. Strong indirect implications are expected for the business-related service sector. Although the results of this economic experiment depend strongly on its underlying assumptions, it can be shown that a break-up of the EMU would result in a heavy welfare loss for Germany.     

The UK and European Monetary Union: Why we should not stand aside

Ahead of next year's IGC David Currie considers the case for European monetary Union. He argues overall that EMU is desirable, though political arguments dominate the economic ones, which are finely balanced. he also argues that the UK should participate if other member states proceed to EMU, because of the dangers of marginalisation in Europe and of reduced attractiveness as a location for inward investment.     

European Monetary Union or competing currencies: which way for monetary integration in Europe?

In theAntibes in September, Mr. Laws on perplexed and irritated his fellow European finance ministers by proposing a scheme for allowing currencies to compete one against the other in Europe. It perplexed them because it was presented as a basis for proceeding towards monetary union within the European Community in accordance with the resolve of European Heads of State at the Madrid Summit, whereas it appeared as a recipe for monetary confusion, not fusion. It irritated them because it appeared to them to be yet another British manoeuvre to derail agreed progress towards greater economic and monetary integration in Europe. It especially annoyed the potential allies of the UK on this issue who regard the French and Commission attempts to push rapidly towards monetary union as ill-advised, and who saw the Chancellor's ill-thought out proposal as playing into their hands. Some political commentators have suggested that Mr. Lawson was seeking to play a clever hand. He is known to favour UK entry to the Exchange Rate Mechanism of the European Monetary System, and on this is at odds with Mrs. Thatcher. Professor Alan Walters, adviser to the Prime Minister, is said to favour the idea of competing currencies in Europe. It may be that the Chancellor was not displeased to have this idea knocked down in the Antibes, leaving a strengthened EMS as the only realistic alternative to full monetary union in Europe. Whatever the truth of this, it seems inevitable that UK opposition to ambitious proposals for European Monetary Union will be met with less sympathy in future as a result of the Antibes meeting. This is a pity. For as we suggested in the June Economic Viewpoint, there is a serious case yet to be made in favour of the idea of competing currencies. This idea need not be in conflict with the objective of exchange rate stability, so that it is not incompatible with the EMS. Competition between currencies need not mean exchange rate instability. Rather it may mean competition over responsible monetary policies, encouraging their spread within Europe. An implication is that full monetary union may not be desirable. If the UK advanced this position in Europe, it may well carry the day. In this Viewpoint, we develop this argument about the direction for further monetary integration in Europe.     

EU Labour Markets and Monetary Union

How can European labour markets cope with a single currency? The single currency success story is the US, which has maintained low unemployment rates both in the country as a whole and in individual regions. But Richard Jackman and Savvas Savouri argue this has been achieved by massive migration of workers from depressed to prosperous areas. In Europe migration within countries is quite low and between countries essentially non-existent. Thus in Europe, unlike in the US, the adjustment to national or regional labour market shocks will depend on wage flexibility. Unhappily wages in Europe are not very flexible, particularly in conditions of low inflation, and the single currency may make them even less so. The prospect for depressed areas is thus bleak.     

The Right Road to Monetary Union

How should European monetary coordination develop? John Chown and Geoffrey Wood argue that the European central banks should be forced to compete in providing the best monetary services.     

Secession in the European Union

This paper argues the case for the right of secession in Western democracies. I suggest that the winners gain more than the losers may lose. Indeed, the external effects of secession may well be positive. However, the political economy of secession is highly problematic. Ideally, the rules for secession should be set at the international level but international organisations have a vested interest in preventing secession. It is easier to establish the right of secession at the national level. The opinion of the European Union institutions that Catalonia and Scotland, after seceding, would have to reapply for EU membership has no basis in the European treaties. Nor has this question been settled in any UN agreement or Vienna Convention. There are merely practices, and they vary among international institutions. The paper concludes with suggestions on how secessions from EU member states and withdrawals of member states from the EU might be implemented.     

The currency denomination of external European Union imports after European Union expansion

Using a multiple market model I examine the impact of euro expansion on the optimal currency denomination of external EU imports. Results suggest euro invoicing will increase more in the EU-expansion country than in the original EU. Exporting firms from dollar bloc countries (the U.S. or countries with fixed exchange rates with the dollar) are more likely to invoice in the euro if price discrimination is already optimal. Firms from outside the dollar bloc are more likely to use the euro when the original EU market is relatively large or transaction costs of exchanging the euro are relatively small.     

Complementary pensions in the European Union

In some countries of the European Union (EU) complementary pension schemes represent a major part of pension provision, whereas in others they play a relatively marginal role. An important factor is whether the social security scheme provides earnings-related benefits and whether the ceiling on eligible earnings for social security purposes leaves room for there to be a demand for supplementary pensions arrangements, in particular for the higher paid. Pressures on the financing of social security, especially with the expected ageing of the population in the first 30 years of the next century, are encouraging many countries to develop complementary provision, and a number of new pension laws have been passed in recent years. However, important though the growth of complementary provision is, it should not be forgotten that investment markets are also likely to be affected by the ageing of the population. There are increasing pressures for greater investment freedom for complementary pension schemes, but little progress has been made by the EU in harmonisation of the regulatory regimes for complementary pensions. If mobility of labour between the countries of the EU is to become a reality, progress needs to be made soon on these pensions issues.     

The Future of European Monetary Arrangements

European Monetary Union is stilla a viable target, but disarray after Maastricht means it will be more difficult to achieve.     

East European prospective members of the European Union under globalisation pressure

Central Eastern European countries will have to find their place in the EU confronted to globalisation challenge. Up to now, except Hungary, becoming an important EU partner in technology intensive industries, they are relying on their labour cost advantage and exchanging lower for higher quality goods. Accession to the EU, changing trading conditions and implying FDI concentration, will be a heavy challenge.     

What role for the European Monetary Institute?

To mark this month's move of the European Monetary Institute to Frankfurt, David Currie examines its role in the light of the 1992/93 ERM crisis. He argues that the EMI has an important role to play in coordinating European monetary policy whether or not progress is made towards EMU, and the track record of the EMI will be critical for the transit to a European Central Bank if it occurs.     

Regulation of Labour Markets in the European Union

EU regulation of labour markets under the Social Charter and Protocol to improve 'employment rights' may appear loudable but can prove costly for firms. Mandates will probably make the unskilled more difficult to employ.     

Briefing Paper: The Interdependence of Fiscal and Monetary Policy under Economic and Monetary Union

This article explores the implications of Economic and Monetary Union (EMU) for the conduct of fiscal policy. Under EMU, where the European Central Bank is successful in controlling inflation, the loss of seigniorage revenues causes a potential problem for public sector deficits. To prevent the debt-income ratio from spiralling upwards, a primary budget surplus is ultimately required. EMU has usually been considered as a strong central monetary authority which forces fiscal discipline on lax national governments. But this is not the only possibility. Because the debt ratio can be reduced by surprise inflation, the price expectations of the private sector are important. Once these are taken into account, EMU can be examined in a 'game' framework in which the reputation of the authorities and the existence or otherwise of cooperation between the fiscal and monetary authorities becomes a critical factor.
The paper finds that where the authorities enjoy reputation and cooperate, a one-off reduction in public spending will lead to a permanent decline in the real interest rate and crowd in extra private spending (consumption and investment). Without reputation the cut in government spending has to be sustained. Where there is neither reputation nor cooperation, the outcome depends on the structure of the European economy and whether fiscal policy can effect the terms of trade between countries. If the terms of trade remain unchanged, the outturn is similar to the case of cooperation without reputation, but where the terms of trade can be improved in one country, there is no incentive to cut public spending. In this case the outturn is higher inflation with private spending crowded out.