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The EMU Macroeconomic Policy Regime and the European Social Model. CES Working Paper, no.114, 2004

Martin, Andrew. (2004) The EMU Macroeconomic Policy Regime and the European Social Model. CES Working Paper, no.114, 2004. [Working Paper]

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    Abstract

    This paper will be a chapter in Euros and Europeans: Monetary Integration and the European Social Model, Andrew Martin and George Ross, eds., Cambridge University Press, 2004. Over time, the impact of EMU on the European social model (ESM) is likely to depend most fundamentally on its effects on unemployment. If EMU makes possible a significant reduction in unemployment, it poses no threat to the ESM. However, EMU is likely to keep unemployment at high levels. This expectation hinges on two propositions: 1) in order to bring unemployment back down after an extended period of disinflation has kept growth below its potential and unemployment high, a period of economic growth above its long-run potential – a growth spurt – is necessary, and 2), the EMU macroeconomic policy regime, as interpreted and implemented by the ECB, blocks such a growth spurt. The first part of the paper describes the policy regime, arguing that the ECB’s implementation of it so far and the bank’s rationale for doing so indicate an unwillingness to permit the growth spurt needed to significantly reduce unemployment. Its rationale invokes the orthodox view that monetary policy has no long run effects on growth and employment. This view is challenged by an alternative view, described in the second part. The alternative rests mainly on an empirical analysis of cases in which disinflation was and was not followed by growth spurts during the 1980s and 1990s. Showing that in the long run unemployment was lower without higher inflation where monetary policy permitted growth spurts than where it did not, this analysis suggests that the ECB’s orthodoxy is fundamentally flawed and that adherence to it will perpetuate Europe’s high unemployment.

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > economic policy
    EU policies and themes > Policies & related activities > employment/labour market > employment/unemployment
    EU policies and themes > Policies & related activities > social policy > general
    EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Harvard University, Center for European Studies > CES Working Papers Series
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 18 Sep 2008
    Page Range: p. 24
    Last Modified: 15 Feb 2011 17:58
    URI: http://aei.pitt.edu/id/eprint/9040

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