Monetary integration,soft budget constraints,and the EMU sovereign debt crises

One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over‐borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht Treaty, the introduction of the Euro, and the suspension of the Stability and Growth Pact (SGP). The methodology relies on difference‐in‐difference regressions for 26 OECD countries over the 1975–2009 period. The findings indicate that the Maastricht treaty reduced deficits especially in traditionally high‐deficit countries. In contrast, the introduction of the Euro and the watering down of the original SGP led on average to higher borrowing. These results indicate that the introduction of the Euro and the suspension of the SGP led to soft budget constraints in the EMU.     

The accomplishment of the Maastricht criteria with respect to initial debt

The reduction of government debt to 60% of the GDP in order to satisfy the requirements of the Maastricht Treaty for participation in the European Monetary Union is one of the primary economic-policy goals for most of the European Union countries. The first aim of the present paper is to characterize the optimal path of the primary surplus that leads to the achievement of this Maastricht target. Using optimal-control theory we are able to determine an upper bound of the public-debt-to-GDP ratio above which no retrenchment policy becomes effective. The second issue taken up is that of the sensitivity analysis with respect to the initial level of the debt-to-GDP ratio, the growth rate of the economy, the interest rate, the inflation rate, and the inverse of the velocity of the monetary base circulation.     

The economic constitution of the European community: From Rome to Maastricht

The present paper analyzes the changes in the economic constitution of the European Community since its foundation in 1958. In order to identify the various changes, we start by developing a frame of reference. Our proposition is that theconstitutional charter of the European Economic Community (EEC)—the EEC Treaty—came closest to this frame of reference, being an economic constitution for a market system, whereas the subsequentprocess of European integration—including several modifications of the Treaty—was largely based on the introduction of non-market elements. Our argument is that as far as the economic constitution is concerned, the Treaty of Maastricht is dominated by traits which are characteristic of modern welfare states.     

FISCAL POLICY AND OPTIMAL TAXATION: EVIDENCE FROM A TAX SMOOTHING EXERCISE

Testing the tax smoothing hypothesis for the EU‐15, we hypothesise that the introduction of the 3%‐deficit rule of the Maastricht Treaty in 1993 may have inhibited tax smoothing as European Union (EU)‐member states are no longer capable of letting the deficit grow as much as implied by expected decreases in government expenditure. Our results show that for some countries this fiscal rule may have indeed changed the validity of the tax smoothing hypothesis, thus implying that EU accession has caused welfare losses.     

Restrictive Macroeconomic Policies and Unemployment in the European Union

This paper looks at the impact the European integration process has had on the unemployment level of European Union member countries. While the persistence of relatively high unemployment in Europe is often attributed to supply-side factors, such as the rigidities of the labour market, this study contends that the major cause for the rise of unemployment in the EU has been the very macroeconomic policies of the EU itself. The paper argues that the continuous pursuit of deflationary policies and the macroeconomic constraint imposed first by the membership of the European Monetary System and, secondly, by the convergence criteria of the Maastricht Treaty, have been the real impediments to reducing unemployment.     

论中国现阶段的赤字率和债务率及其警戒线

论证和说明中国现阶段的赤字率和债务率及其警戒线 ,是本文展开分析的主题。围绕这个主题 ,作者首先分析和阐明了“三部门”经济条件下的债务—赤字模型 ;然后对中国均衡的和动态均衡赤字率和债务率的决定进行了理论分析 ;最后 ,在债务—赤字模型基础上 ,借鉴欧盟经验 ,通过实证分析 ,论证和揭示了与中国现阶段国民经济发展相适应的赤字率和债务率及其警戒线     

Which Single Currency for Western Europe?

The Maastricht Treaty calls for a single European money in the third and final stage of European monetary integration. The purpose of this paper is to infer the preferred currency from the point of view of economic agents in each EMS country by ranking the realized distributions of returns from holding foreign currencies. These rankings are obtained using the notion of generalized stochastic dominance. The preferred currency varies with time and the portfolio considered. In all cases, the ECU is not supported as a likely dominant money.     

Time-varying effects of fiscal policy in Spain: a Markov-switching approach

How have the effects of Spanish fiscal policy varied over time? Given this starting point, in this article we analyse the regime dependence of fiscal policy in Spain by estimating a vector autoregressive model within a Markov-switching framework. Our results indicate that Spain’s membership of the Economic and Monetary Union (EMU) is the most likely source of time variation in the fiscal outcomes. Accordingly, increases in the primary deficit-to-GDP ratio do not succeed in stimulating economic activity in the first regime; rather, unexpected upsurges in the primary deficit harm economic activity (non-Keynesian effect) in the second regime, which prevails since the ratification of the Maastricht Treaty.     

The European Union's debt question: A conceptional viewpoint

The state can be conceived as an organization to protect personal freedom and to provide public goods. Consequently, we expect a constitution to consist of two different sets of rules; rules on personal freedom and rules for making collective decisions on public goods (mostly budgetary rules). The constitution of the European Union as laid down in the treaty of Maastricht (1992) provides both types of rules, but the emphasis is mainly on the former rules. This paper investigates budgetary rules, in particular the welfare economic logic of deficit spending.     

Selected transition and Mediterranean countries: an institutional primer on EMU and EU accession

The paper examines the institutional channels through which Economic and Monetary Union (EMU) in the European Union (EU) can affect the transition countries of Central and Eastern Europe and three Mediterranean countries that aspire to join the EU.
After describing the current institutional framework for relations between the EU and these countries, the paper considers two categories of institutional implications of EMU. The first stems from the need to satisfy the Maastricht convergence criteria before joining the euro area. Although the Maastricht criteria are not accession criteria, many of the countries reviewed are already formulating their macroeconomic policies in a way that will facilitate convergence toward the Maastricht targets. The second implication stems from the need to adopt the EU's institutional and legal provisions in the area of EMU, such as those referring to the establishment of independent central banks, the prohibition of central bank financing of the government and the liberalization of capital movements. Finally, the paper discusses some of the key policy issues that EMU raises for the countries reviewed, in particular regarding exchange rate policy, capital account liberalization and the possible conflict between growth-enhancing measures and the Maastricht criteria.     

The impact of the European Union fiscal rules on economic growth

This paper analyses whether Maastricht and Stability and Growth Pact fiscal rules have affected growth in the European Union negatively. A growth equation is specified for a group of 15 European Union countries (and 8 OECD countries) over the period 1970-2005 to analyse this issue. Panel estimations using fixed-effects, pooled mean group and system-GMM estimators show that the institutional changes that occurred in the European Union after 1992 were not harmful to growth. Moreover, results show that growth is slightly higher in the period in which the fulfilment of the 3% criteria for the deficit started to be officially assessed, i.e. after 1997.     

Is There a Trade‐Off Between Inflation Variability and Output‐Gap Variability in the EMU Countries?

This paper examines the performance of monetary policy in eleven EMU countries for the whole period of the EMS. This is based on the trade‐off between inflation variability and output‐gap variability. To this end, we examine whether the introduction of an implicit inflation targeting by the EMU member countries after the Maastricht Treaty, changed the trade‐off between inflation variability and output‐gap variability. We employ a stochastic volatility model for two sub‐periods of the EMS (i.e. before and after the Maastricht Treaty). We find that the trade‐off varies amongst EMU countries. The implication of these findings is that there are asymmetries in the euro area, due to different economic structures among the member countries of the EMU.     

THE POLITICS OF MAASTRICHT

The Economic and Monetary Union (EMU) treaty signed at Maastricht does not guarantee the recreation of German-style economic policies and outcomes at the European Community (EC) level. Membership was not limited to countries that mimic the German commitment to price stability. National representatives may outvote inflation-averse EC central bankers in monetary policy decisions. The Council of Ministers has the power to set exchange rate policy vis-à-vis third currencies. The treaty does not provide binding constraints against fiscal profligacy in member states. The German government agreed to this suboptimal outcome because in the wake of the demise of the Soviet Union and German unification it had broader political interests in maintaining the pace of European integration at Maastricht. The Bundesbank's policy of high interest rates in 1992, however, has effectively guaranteed a two-speed monetary union, in which the first group of members will be limited to a narrow deutschemark zone. Given the waning enthusiasm for integration across the EC, the German government has no incentive to alter this outcome.     

Euro introduction: Has there been a structural change? Study on 10 European Union countries

The introduction of the Euro in January 1999 consecrated the achievement of a single currency system within most of the European Union. Despite the dramatic change in the macroeconomic dynamics that this event is likely to have caused, the literature has paid little attention to testing for the existence of such a break and establishing its qualitative characteristics.This empirical study, based on the Blanchard and Quah (1989) methodology for seven countries having adopted the Euro currency and three members of the European Union which have preserved their own currencies reveals:

• i)very significant breaks for the Euro countries around 1992 – the year of adoption of the Maastricht Treaty – and 2000, not shared by the three non-Euro countries.
• ii)an increase in the influence of supply shocks on the dynamics of output, unemployment and the interest rate after the breaks for the Euro countries, along with an increase of the part played by monetary disturbances within total demand at long horizons. These conclusions do not generally hold for the three non-Euro countries.

     

“Twin deficits” in Greece: in search of causality

Abstract:

The paper discusses the trajectories of the Greek public deficit and sovereign debt between 1980 and 2010 and its connection to the political and economic environment of the same period. We pay special attention to the causality between the public and the external deficits in the period after 1995, the post–Maastricht Treaty period. We argue that, due to the European monetary unification process and the adoption of the common currency, causality ran from the external deficit to the public deficit. This hypothesis is tested econometrically using both Granger causality and cointegration analyses. We find empirical support for this hypothesis.     

Institutional Reform and Co-Decision in the European Union

This paper studies the Treaty of Amsterdam's reform of the co-decision procedure in the European Union. The paper presents spatial models of the procedure, and examines whether the Treaty significantly alters it. The theory analyzes the implications of the Treaty for the equilibrium EU policies and the institutions' powers. It characterizes sets of policies the Commission can successfully propose under the old procedure, and sets of policies the Council and the Parliament can successfully propose as joint texts under the new procedure. The paper concludes that the new procedure does not lead to a further increase in the Parliament's powers, as intended by the drafters of the Treaty. Rather it finds that the Treaty eliminates the Commission's power under co-decision and may increase indecision.     

Co-ordinating Stability: Some Remarks on the Roles of Monetary and Fiscal Policy under EMU

The launch of Monetary Union in Europe has prompted calls for enhanced policy co-ordination among economic policy-makers. This paper sounds a note of caution and argues that the problem of policy co-ordination needs to be placed in the broader context of the efficient assignment of tasks and responsibilities among separate actors. In the presence of incentive and information problems, overly ambitious attempts at EXPLICIT forms of policy co-ordination may actually turn out to undermine the IMPLICIT co-ordination properties of the clear division of responsibilities enshrined in the Maastricht Treaty. A single monetary policy that is credibly geared to the maintenance of price stability and national fiscal policies that genuinely accept the constraints of the Stability and Growth Pact already go a long way in securing macroeconomic stability. Additional channels for dialogue among policymakers should be helpful to the extent that they enhance the understanding of individual responsibilities and do not dilute accountability.     

The constitutional future of the European Union

The formal distinction between a treaty and a constitution is much less important than the question of who is authorized to interpret and amend it. The judges of the European Court of Justice interpret the Treaty by simple majority, while unanimity of the member-states would be required to reverse these decisions. The European Union needs a Court whose judges are empanelled from, and selected by, the highest courts of the member-states. The Treaty on European Union violates three fundamental constitutional principles: (i) the principle of the separation of powers, (ii) the democratic principle, and (iii) the principle of subsidiarity.     

FISCAL INDULGENCE IN CENTRAL EUROPE: LOSS OF THE EXTERNAL ANCHOR?

In recent years, fiscal performance in Central Europe has steadily deteriorated, in contrast to the improvement in the Baltics. This paper explores the determinants of such differences among countries on the path to European Union (EU) accession. Regression estimates suggest that economic and institutional fundamentals do not provide a full explanation. An alternative explanation lies in the political economy of the accession process, and a game‐theoretic model illustrates why a country with a stronger bargaining position might have an incentive to deviate from convergence to the Maastricht criteria. The model generates alternative fiscal policy regimes – allowing for regime shifts – depending on country characteristics and EU policies.     

The French rejection of the European constitution: An empirical analysis

The French rejection of the Treaty Establishing a Constitution for Europe on 29 May 2005 resulted from (1) fear of loss of national identity as a result of the European integration process and (2) the voters' sanction of the French government's record. Using cross-section data covering the 96 French metropolitan departments, we estimate referendum vote functions in order to assess the effects of these influences on the outcome of the referendum. Estimated coefficients are compared with estimates from the 1992 Maastricht referendum.