"Policy co-ordination and economic adjustment in EMU: Will it work?"

Mayes, David G. and Viren, Matti. (2001) "Policy co-ordination and economic adjustment in EMU: Will it work?". In: UNSPECIFIED, Madison, Wisconsin. (Unpublished)

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Abstract

The EU has set in place a series of mechanisms to try to co-ordinate fiscal, "structural" and monetary policies in order to achieve the objectives of EMU for the 12 members. All of these mechanisms are unique and untried. There is single monetary policy run by the combination of the national central banks and the new European Central Bank under the umbrella of the Eurosystem. There are restrictions on the scope of the member states' fiscal policies, which remain a national responsibility, and attempts to encourage co-ordination and discourage tax competition. Structural policies are governed by the processes of "soft co-ordination,"involving the setting of objectives and mutual surveillance. In comparison with the U.S. these measures look rather limited. The basis for their structure owes more the practicalities of what could be agreed than to some careful assessment of the needs of efficient and effective policy. This paper reviews the mechanisms and provides an empirical assessment of this policy structure in practice. We show that while there are problems in running a single monetary policy for a diverse area, the main problems do not relate to co-ordination among macro-economic policies. The policy balance is not necessarily going to be biased and fiscal policies are not inhibited from the diversity necessary to reconcile the differences among the member states. Co-ordination provides a benefit particularly to smaller countries. Initially the incentives behind soft co-ordination appear to be having an effect but structural change is traditionally the most difficult to effect.

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