The Assessment: EMU, Four Years On

This paper reviews the functioning of the Economic and MonetaryUnion over the first 4 years of its existence. Monetary policyis viewed as having been of the ‘inflation-targeting’type, but with a tendency towards delay and conservatism inadjustment, which may also reflect over-optimistic output growthforecasts. The resulting pressure on the Stability and GrowthPact (SGP) illustrates the weakness in the ‘consensusview’ of the harmonious interaction of monetary, fiscal,and supply-side policies, which requires policy in all threeareas to be ‘correct’. In discussing reform of theSGP, a looser but still constraining form of fiscal agreementis advocated. The supply-side and balance-of-payments issuesinvolved in inter-country adjustment also interact importantlywith the SGP and are identified as key areas of difficulty ina still ‘immature’ monetary union, with separatelabour-market structures. Here the mechanisms for coordinationare more or less absent.     

The stability and growth pact, fiscal policy institutions and stabilization in Europe

Ever since its inception, the EMU has been subject to controversy. The fiscal policy rules embedded in the Maastricht Treaty, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP has constantly been accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries since the Maastricht Treaty. This paper argues that this conclusion stands up to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data, there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to less use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999–2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in forecasting the output gap, and not the result of a change in the intentions of policy-makers. As a result, there is no evidence to support the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policies.     

Rotating Slumps in a Monetary Union

In the decade since its creation in 1999, the European Economic and Monetary Union (EMU) has experienced surprisingly large and persistent inflation differentials across member states causing substantial shifts in relative price levels. At the same time, member countries exhibited distinct non-synchronized output fluctuations, giving rise to a pattern of ‘rotating slumps’ (a term coined by Olivier Blanchard). This paper presents a stylized theoretical model of a monetary union which demonstrates how inflation differentials and relative output movements interact dynamically. A number of implications are derived from the model. In particular, national fiscal policies are shown to have an important role in containing internal macroeconomic disparities in a monetary union. An optimal fiscal policy rule is derived from the model for that purpose.     

Regional currency arrangements: insights from Europe

This paper focuses on the requirements and features of a successful monetary union on the basis of the optimum currency area theory, the “logical roadmap” for integration as proposed by Balassa as well as the economic and institutional framework of the European Economic and Monetary Union (EMU). The analysis suggests that monetary union is contingent upon high economic integration and strong political commitment. However, political union is not an ex-ante requirement. Outside factors such as systemic shocks and globalization seem to speed up the pooling of sovereignty in the economic domain. A firm commitment to stability-oriented monetary and fiscal policies is a precondition for gaining credibility and trust within and outside a monetary union. Last, but not least, convergence criteria, fiscal rules and strong institutions are necessary to help ensure and monitor the participants’ compliance. However, the European experience is not a blueprint for regional integration that can be directly and entirely applied to other regions.     

Macroeconomic adjustment programmes in the euro area: an overall assessment

Since the start of EMU (Economic and Monetary Union), the euro area, and more broadly the global economy, experienced an unprecedented credit boom. The expansion of credit was particularly strong in Greece, Ireland, Portugal and Cyprus and all of them subsequently needed official financial support. In each of the four programmes, financial assistance has been provided and promised against the commitment of each country to fulfil certain economic policy conditions contained in the macroeconomic adjustment programme. In general, a macroeconomic adjustment is a process driven by policies but also by changes in private spending behaviour (consumption, imports, investment) and improvement in competitiveness that countries are required to undertake after a large shock. In the case of the four countries, the shock emerged as a consequence of an excessive accumulation of imbalances in different parts of the economy: in the public sector in Greece, in the housing and banking sectors in Ireland, external imbalances in Portugal and in the banking sector in Cyprus. The paper looks at the feasibility of the fiscal adjustment comparing the macroeconomic conditions in the four countries and emphasising the role of the fiscal multipliers in the process. It also assesses the fall in the output in a comparative framework, stressing the role played by the different components of demand either in amplifying the effect of the fiscal consolidation or in offsetting it. In addition, it considers formulation of the programmes as well as their implementation with most attention devoted to reforms aiming at improving competitiveness, growth and employment in the framework of a cross-country approach.     

Macroeconomic Policy Interaction under EMU: A Dynamic Game Approach

In this article, we study macroeconomic stabilization in the Economic and Monetary Union (EMU) using a dynamic game approach. With the aid of a stylized macroeconomic model, this article analyzes the transmission and interaction of national fiscal policies and monetary policy of the European Central Bank (ECB) in the EMU. A special focus is on the effects of labor market institutions in the participating countries and of the introduction of fiscal stringency criteria like those imposed in the Stability and Growth Pact.     

Monetary Unions in Historical Perspective: What Future for the Euro in the International Financial System

This paper discusses the introduction of the euro in the present international monetary context. European Monetary Union is not only an economic concept but also primarily a political one. Based on past experience, two aspects of monetary union seem essential: the nature of the future European Central Bank and the necessity that monetary union is implemented with a fiscal union. The euro's success on world markets, as a dollar substitute, depends on monetary authorities' credibility in targeting low-inflation, and on fiscal authorities' reputation. A central bank that does not respond to a political authority can cause social difficulties, especially if social policies are left in the hands of single countries and fiscal transfers, to support these policies, are not allowed     

欧洲货币联盟设计中的缺陷

欧债危机暴露了欧洲货币联盟运作机制的设计缺陷:财政纪律松散、金融监管失当和欧洲央行角色定位存在偏差。危机也为欧元区矫正缺陷提供了改革契机。强化财政纪律有两种思路,制定新的"财政条约"和采取"宪制安排";提高监管效率的改革理念是实施金融监管集中化;欧洲央行应将金融稳定作为主要目标,并承担最后贷款人的角色。文章对上述理念进行了评述,指出除此之外欧盟需要开展更加广泛和深刻的改革。     

Stability and Growth Pact: issues and lessons from political economy

The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. Following a literature survey, the paper stresses the importance of appropriate incentives for rule compliance in an environment where national fiscal sovereignty precludes the option of centralised enforcement. In addition, the paper stresses the importance of clear and simple rules and in particular the 3% deficit limit in anchoring expectations of fiscal discipline and facilitating public and market monitoring of public finances. This, in turn, strengthens incentive for rule compliance. Moreover, the paper discusses the interests of the most important players in European fiscal rule formation and the importance of choosing the appropriate time for initiating a reform debate.Non-technical summary The EU fiscal framework as laid down in the Maastricht Treaty and the Stability and Growth Pact (SGP, the Pact) aims to preserve fiscal sustainability while allowing room for automatic fiscal stabilisation. These two objectives are also at the heart of the ECB’s interest in the EU fiscal framework because their attainment facilitates monetary policy making in the short and long run.The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. The literature review of the first part reveals that fiscal rules can help solve deficit/debt biases and time inconsistency problems by constraining the behavior of policy makers. But rules can also mitigate biases if they facilitate financial market and public scrutiny of fiscal policies.Thereafter, the paper analyses the institutional environment in which EU fiscal rules are applied. It argues that EU rules reflect a “contract” amongst countries that retain sovereignty on fiscal policies. Enforcement, therefore, ultimately has to be undertaken by the contracting parties. Due to this constraint, the rules can also be characterised as “soft” law (with the 3% limit being nevertheless a much “harder” constraint than the other elements). But this does not necessarily imply that the rules are ineffective (or “dead”). Soft law reduces political transaction costs (by improving transparency and providing a forum for peer pressure). Moreover, if well-designed, such law can boost incentives towards making the rules “self-enforcing”. Evidence speaks in favour of this view: while EU fiscal rules were bent in a number of cases and compliance is undeniably of concern, major and rapid fiscal balance deteriorations have been largely prevented since the start of EMU.The paper also looks at potential trade-offs between “complex” rules where a “fine-tuned” economic rationale may boost acceptance of the rules versus simple and clear rules that allow easy monitoring. It is argued that clarity and simplicity of rules are important especially when formal enforcement is limited (“soft law”) and public monitoring becomes more important. By facilitating public and market monitoring of compliance, clear and simple rules are also more costly to breach.The benefits of “complexity”, and in particular the use of administrative discretion to fine tune the rules to country situations have limits, in particular when it comes to the excessive deficit procedure (EDP). It is argued that the 3% deficit limit and the time frame for correcting excessive deficits already provide some room to accommodate economic circumstances. The 3% limit must be clear, simple and strictly implemented to anchor expectations of fiscal discipline and to facilitate public and market monitoring. Further discretion and relaxation would conflict with this need. From this angle, other risks (e.g., efforts not materializing, structural reforms producing surprise costs etc) are hard to justify as a reason for extending deadlines to correct excessive deficits.The preventive arm of the Pact with its requirement of close-to-balance-or-in-surplus budgetary positions defines sound medium term budget positions and adjustment paths. This may be appropriately fine-tuned to address concerns about the Pact’s underlying economic rationale. For example, a symmetric application in good and bad times and less time inconsistency would be desirable.Finally, the timing of a debate on fiscal rules needs to be carefully chosen. In the EU context (and perhaps in other contexts as well), there seems to be much inherent pressure to make the rules more “complex”. Moreover, for the debate initiated in summer 2004, there was also no willingness by countries to give up sovereignty nor was there a sense of urgency to strengthen public finances via tighter rule implementation and enforcement. In such an environment, it is likely that changes to fiscal rules make them more complicated, discretionary and, thereby, potentially less enforceable.The views expressed are those of the author and not of the ECB. Comments by Vitor Gaspar, Mark Hallerberg, Steven Keuning, Jose Marin, Richard Morris, Gilles Noblet, Hedwig Ongena, Luca Onorante, Rolf Strauch, Juergen von Hagen, an anonymous referee and valuable assistance by Anna Foden are much appreciated.     

Beyond Borders: The Euro Crisis and Public Support for Monetary Integration in East Africa

We show that economic experiences in one part of the world affect proposed policies elsewhere. Specifically, we find that the recent crisis in the European Monetary Union (EMU) has impacted negatively the public support for the new proposed monetary union in the East African Community (EAC), with a more pronounced effect for less educated Kenyans. That external effect is robust to controlling for an array of other factors such as the expected economic benefits from the union, the desire to gain international influence as part of a larger community and the memory of an earlier failed EAC monetary union.     

Fiscal discipline in the European monetary union

This paper explores the question of how national fiscal policies could be conducted within the European Monetary Union. The discussion touches upon this issue in relation to the theory of optimum currency areas; presents the debt sustainability issue in the context of a monetary union; examines briefly the determinants of debt dynamics; and interprets the restraints imposed on national fiscal policies by the Maastricht Treaty. The tentative conclusion is that the creation of the EMU will be associated with smaller size national government sectors.Invited Address at the Thirty-Seventh International Atlantic Economic Conference, Athens, Greece, March 8–15, 1994. Financial support by the Economic Research Center of the Athens University of Economics and Business is gratefully acknowledged.     

Fiscal and monetary policy in a monetary union: Credible inflation targets or monetized debt?

Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetized Debt? —The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank sets the nominal interest rate and responds to rising government debt/GDP ratios by monetization. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if the governments bear sole responsibility for solvency, but the public sector remains excessively large. The best scenario occurs if the central bank removes the incentive for the governments to engineer surprise inflation by credible inflation targeting.     

Lessons from historical monetary unions - is the European monetary union making the same mistakes?

This article examines three historical monetary unions: the Latin Monetary Union (LMU), the Scandinavian Monetary Union (SMU), and the Austro-Hungarian Monetary Union (AHMU) in an attempt to derive possible lessons for the European Monetary Union (EMU). The term ‘monetary union’ can be defined either narrowly or broadly depending on how closely it conforms to Mundell’s notion of ‘Optimal Currency Area’. After examining each of the historical monetary unions from this perspective, the article concludes that none of them ever truly conformed to Mundell’s concept, nor does the EMU. Nevertheless, the article argues that some lessons may be learned from these historical experiences. First, it is necessary that there exist robust institutions such as a common central bank and a unified fiscal policy in order to withstand external shocks. The three early unions could not withstand the shock of WWI. Another important lesson is that continuing national rivalries can undermine any monetary union.     

Real time uncertainty in fiscal planning and debt accumulation in the euro area

Using real time data from the OECD this study explores euro area fiscal policies since the late 1990s. The results indicate that in the so-called periphery countries (Greece, Ireland, Italy, Portugal and Spain) ex ante fiscal plans have been more sensitive to economic cycles in the countercyclical direction than in the other euro area countries. Accumulated debt ratios in the periphery reflect high initial debt ratios, underlying deficit biases and cumulated errors in the data on macroeconomic imbalances. Overall, reliable statistics, balanced macroeconomic developments and longer-term policy orientation are crucial for sound and sustainable public finances.     

International Monetary and Financial Arrangements: Present and Future

The paper deals with a broad range of topics under the rubric of the international monetary system: exchange rate agreements, International Monetary Fund structure, history and functioning of the European Monetary Union, monetary and fiscal policies adopted in recent years by different countries, with a special emphasis on central bank independence and inflation control, capital flows and cross-border assets growth and their influence on financial stability, and policy proposals to enhance financial stability. With more than four-fifths of world trade conducted under managed or full flexibility the present system can be regarded more as a flexible than a fixed exchange rate regime. EMU is a major institutional innovation; while its economic benefits have been amply discussed and perhaps exaggerated, the economic costs seem to have been underestimated. Financial liberalization has resulted in huge benefits to savers and borrowers as capital has tended to flow to its most productive uses around the world, but it has also led to fears that this has sharply reduced the effectiveness of monetary policy. This liberalization imposes a constraint on monetary policy in the sense that it forces a much higher degree of economic convergence than was true before.     

Strategies for fiscal consolidation in Japan

Japan's key fiscal challenge is to put public finances on a more sustainable footing. This paper investigates the macroeconomic implications of alternative fiscal strategies for Japan using the IMF's Global Fiscal Model. The results suggest that (i) an adjustment package that achieves primary balance through lower social transfers and government spending and a higher VAT is the most viable option and has a smaller negative impact on growth than other fiscal measures; (ii) achieving primary balance is not sufficient to stabilize the net debt ratio; (iii) prefunding future aging costs provides greater long-term benefits compared with less front-loaded strategies; (iv) tax reform involving shifting from corporate taxation to consumption taxation could mitigate the short-term output losses associated with fiscal consolidation; (v) the spillovers to the rest of the world from consolidation in Japan are positive in the medium term, but modest.     

涉农专项资金使用管理存在的问题及对策

随着惠农政策的不断完善,公共财政资金向农村倾斜越来越明显,与此同时,社会对涉农专项资金的使用效益关注度越来越高。涉农资金管理应当调整优化,统筹规划,逐步完善制度建设,加强规范性。     

CREDIT POLICY STRESS IN THE WEST AFRICAN ECONOMIC AND MONETARY UNION

This paper examines credit policy stress in the West African Economic and Monetary Union and provides evidence that a regional credit policy would not suit all the countries that are members of this currency union. Some countries obtain a higher volume of domestic credit when policy is conducted at a domestic level than they would in the context of a single regional policy. Furthermore, there are differences in the country‐specific reaction function to changes in the economic environment. To show the inappropriateness of a regional credit policy within the West African Economic and Monetary Union area, we compute credit stress indicators both for the countries and for the region taken as a whole. The stress indicators represent the gap between the optimal policies conducted at country and regional levels. Our study covers the period from 1980 to 2007.     

The german stability program: A quantitative assessment

In the Maastricht Treaty and the European Stability and Growth Pact, it was recognized that high public deficits and debt levels would endanger the success of the European Economic and Monetary Union. In its stability program, updated in December 2001, the German government published its objective to achieve a balanced general budget in the year 2004. The budget of the central government should be balanced in 2006 [Bundesfinanzministerium, 2001]. This paper analyzes the effects of strict budget consolidation policies on important macroeconomic variables like inflation, unemployment and GDP growth. It is shown that a balanced budget as early as 2004 would necessitate high public consumption and investment. These should be financed by higher indirect taxes, whereas social security contribution rates should be reduced to bring unemployment down.     

Enlargement, the Lisbon Agenda, and the Economic Development of Member States

The issues of enlargement, the Lisbon Agenda, and economic development are important not only to new European Union (EU) member states but impact all 25 countries. EU membership may help the new members to foster long-term economic growth through increased credibility, effective use of structural funds, a better framework for economic growth, and entry into the European Monetary Union (EMU). The economic growth of all member states can be strengthened if the reforms related to the main goals of the Lisbon Agenda are completed. Action must be taken both at the member-state level and at the Community level. At the member-state level it is necessary to assure fiscal consolidation and deregulation. At the Community level the preservation of the Stability and Growth Pact, completion of the single market, especially in the service sector, and enforcement of limits on public aid are of the greatest importance.The 2006 Robert A. Mundell Distinguished Address presented at the Sixty-First International Atlantic Economic Conference. Berlin, Germany, 15–19 March 2006. In preparing this paper, I was assisted by Pawel Opala and Andrzej Rzońca. The usual caveats apply.