Guide Challenges for Economic Policy Coordination within European Monetary Union

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"Challenges for Economic Policy Coordination within European Monetary Union," Empirica, Springer;Austrian Institute for Economic Research;Austrian.
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The idea of more intensive monetary integration was tabled in the late s after the adoption of the Single European Act , which set a course towards full integration of the single internal market.

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In this light, a single currency seemed to be one of the fundamental attributes of the single internal market. The main political steps towards the future monetary union included the meeting of the European Council in Hannover in , the Delors Report of and the Maastricht meeting of the European Council in December , which, on the basis of the Delors Report, approved the plan for creating the Economic and Monetary Union. The legal foundations of the Economic and Monetary Union were laid down in a set of agreements signed in February in Maastricht, commonly referred to as the Maastricht Treaty.

These documents came into force on 1 November Under the Treaty the changeover to the single currency was to take place in three stages — two preparatory stages and a third and final stage of euro adoption. To check whether the conditions had been created for moving to Stage Three of Economic and Monetary Union EMU , involving the actual introduction of the single currency, the Treaty laid down convergence criteria.


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These criteria were defined on the basis of theoretical considerations about the conditions needed to ensure sustainability of a single currency in a group of countries. They include in particular requirements for low inflation and long-term stability of mutual exchange rates with respect to balance of payments equilibrium.

The other criteria focus on ensuring public finance sustainability by setting a maximum ratio for the public budget deficit as a percentage of GDP and a maximum ratio for the absolute volume of public debt as a percentage of GDP at market prices. A criterion leading to convergence of the interest burden of long-term public borrowing was also defined.

The relatively detailed fiscal criteria stemmed from the fact that although the political negotiations on the conditions of operation of the new currency had resulted in support for the idea of a single currency and a single monetary policy, no corresponding measures had been taken in the economic and fiscal policy area, where coordination became the main method of cooperation. The Treaty provides for a derogation regime a temporary exemption allowing later entry into Stage Three for countries that have not yet satisfied the convergence criteria.

At the time the Maastricht Treaty — which, among other things, stipulated an excessive deficit procedure — entered into force, most EU countries were not compliant with the two criteria limiting excessive deficits. There were also doubts about whether the public finance deficit requirements were merely an eligibility criterion for euro adoption or whether they would also have to be met in the future.

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On the basis of this debate, the European Council adopted a Resolution on the Stability and Growth Pact SGP at its meeting in Amsterdam in June confirming the general validity of the deficit requirements after euro adoption and declaring the validity of the procedures and measures laid down in the Treaty. As expected, an extraordinary EU summit held in early May approved the membership of 11 countries in the euro area commonly called the Eurozone , although a more tolerant interpretation of the Treaty was applied in the case of compliance with the fiscal criteria in some countries.

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Greece joined the euro area on 1 January , although it turned out later that some of the statistical documents it had submitted, especially in the public finance area, had been intentionally distorted and had not reflected the actual situation of the Greek economy. The legal acts completing the changeover to the euro were passed in — The non-cash changeover at the start of proceeded smoothly.

During the changeover weekend, government finances were converted to the euro and most government securities were redenominated in the euro. Commercial banks were also ready to provide services in the new currency. The national legislation allowing the euro area countries to introduce the euro as their national currency took effect on 1 January The period — saw preparations for the cash changeover. The situation at that time was made easier by the fact that the necessary institutions and mechanisms — in particular the European Central Bank, which created the monetary policy of the euro area and coordinated the preparations for issuing euro banknotes and coins — had already been established.

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The situation was also simplified by dual display of prices during the transition period, as this prepared the public for the new prices of goods after euro adoption. For these reasons it was possible to shorten the originally planned changeover period from six to two months. The twelve countries that adopted the cash euro in were joined by Slovenia in , Malta and Cyprus in , Slovakia in , Estonia in and Latvija in This took the number of euro area countries to The first ten years of the euro can be described as a period of relative calm, despite gradually growing imbalances between individual countries.

This calm was aided chiefly by the following factors: the smooth start of the new currency; its timing a period of globally low inflation ; the relatively smooth running of the single monetary policy, especially in the initial period link to the ECB website ; falling long-term interest rates in most member countries; gradual appreciation of the euro against the dollar; and rising use of the euro as an international trading and reserve currency.

In the same period, however, the member countries showed increasing structural imbalances arising mainly from their different levels of competitiveness. The public in the euro area countries felt that prices — especially of services — had gone up, even though the actual act of euro adoption and the price conversion process were meant to have been price neutral. The outbreak of the financial and economic crisis was a turning point in the development of EMU.

In the second half of , the crisis manifested itself in an increased number of bankruptcies, most of them outside the EU the United States, Iceland but with direct impacts on the assets of most Western European banks.


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The banking sector crisis spilled over to other sectors. This necessitated a massive increase in state subsidies and interventions, resulting in the fiscal Maastricht criteria being exceeded far beyond the levels stipulated in the Treaty. At the same time, the imbalances which had long been accumulating were revealed in full.

At the start of , therefore, we can say that the crisis entered a new phase — a public debt crisis see below. This crisis was most acute on the southern periphery of the EU and also in Ireland. At the March meeting of the European Council a discussion took place about the need for longer-term measures to correct the fiscal situation and imbalances in the euro area. In October , the Task Force submitted a final report containing the following recommendations:.

The European semester was approved by the European Council in June As from , these programmes will be submitted by the end of April of the current year. The European semester should result in better coordination of the economic policies of EU countries, as it will be possible to incorporate Council recommendations into draft national budgets and their medium-term outlooks in the current year.

The tightening of the SGP, the introduction of surveillance of macroeconomic imbalances and the setting of minimum requirements for national fiscal frameworks were the subject of six legislative proposals issued by the European Commission in September In addition to the above measures aimed at enhancing budget policy responsibility, two programme documents focusing on economic policy coordination were recently adopted: the Europe Strategy and the Euro Plus Pact.

The Europe Strategy is the basic development strategy for the EU as a whole until It was approved by the European Council in June and contains five headline quantified objectives and ten integrated guidelines. The original informal French-German proposal to establish a Competitiveness Pact was replaced by a joint proposal of the President of the European Council and the President of the European Commission, which was subsequently modified into the final form of a Pact for the Euro agreed by top euro area representatives at a summit on 11 March The pact is consistent with existing economic instruments or proposals such as the Europe Strategy, the European Semester, the Stability and Growth Pact and the new macroeconomic surveillance framework.

It develops them by setting more ambitious political objectives at the highest political level in several key areas. The proposal pursues four goals:. The countries will voluntarily adopt specific commitments and, at their discretion, set their own choice of actions to achieve them, always for a timeframe of 12 months.

Challenges for Economic Policy Coordination within European Monetary Union

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