Economic Policy in EMU: A Study by the European Commission Services

Economic Policy in EMU: A Study by the European Commission Services

Economic Policy in EMU: A Study by the European Commission Services

Economic Policy in EMU: A Study by the European Commission Services


With the advent of the third and final phase of European and Monetary Union (EMU), the debate over European monetary unification is at the top of the political and economic agenda. Much has been written over the past five years about whether EMU is justified given the various expected benefits and prospective costs, but there has been little detailed material on how EMU will work and what the practical implications of it will be for Europe as a whole. Economic Policy in EMU is a comprehensive look at the mechanisms involved, likely effects on monetary and budgetary policy, and the ways in which monetary union will deal with and affect business cycles and regional differences. It combines rigorous analysis of how the European economy works with an insider view of how this will change after 1999: as such, it is vital reading for all involved in the most important topic facing Europe today.


On 1 January 1999, Economic and Monetary Union (EMU) moves to its third and final stage and the euro becomes the single currency for a first group of eleven eu countries. the time has come, therefore, to shift our attention from the legal and technical issues of the transition to the more economic topic of the actual functioning of monetary union.

European monetary union must be understood as comprising two separate, but complementary facets: a single currency and a stable currency. These two facets correspond to the two interrelated objectives of EMU: efficiency and stability.

The commitment by national public authorities to meet the terms of the Treaty on European Union (better known as the Maastricht Treaty) for creating emu is already bearing important fruit in terms of stability. As shown in the European Commission's (1998) Convergence Report, in the past several years, the convergence towards low inflation has been impressive and, although more efforts are in order, budget deficits have been substantially reduced. This has resulted in more stable nominal exchange rates and lower long-term interest rates, thus paving the way to the current economic recovery.

Although emu represents first and foremost a monetary policy regime change, its implications are much wider. the construction of emu is geared towards the stability of the new currency, and sound public finances. Together with a well-functioning Single Market, this new policy regime is bound to bring about a new economic environment with fundamental consequences for the behaviour of public and private agents.

The gradual elimination of budget deficits, as provided for by the Stability and Growth Pact, implies that government debt, currently still at too high levels, will be set on a consistently downward path. This will have beneficial consequences for interest rates and private investment, help to restructure public expenditure by giving more weight to growth-enhancing factors (such as investment in education and infrastructure), and increase the room for manœuvre of national budgetary policies in stabilising the cycle. Budgetary discipline will also imply a new, fairer contract between the current and the next generation, which will not have to shoulder the burden of today's spending choices. in total, with the change brought about by the emu regime, the risk of a new stability conflict between the monetary and budgetary policies, which in the past repeatedly contributed to the unsatisfactory growth and employment performance of the Community, could be avoided in the coming years.

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