Economic and Monetary Union Macroeconomic Policies

Current Practices and Alternatives

P. Arestis,Kenneth A. Loparo

• Éditeur: Palgrave Macmillan
• Année: 2013
• ISBN:
  9781137317896
• Sujet: Economics
• Sous-sujet: Macroeconomics

This book focuses on the construction of the economic policies of the Economic and Monetary Union (EMU) and its institutions. It reviews the faltering economic performance of the EMU countries before and after the onset of the financial crisis.

1

Introduction

1.1 General considerations

It was only during 2011 that the possibility of some form of break-up of the Economic and Monetary Union (hereafter EMU, and alternatively referred to as the euro area or euro zone) with one or more members leaving, especially Greece, became a matter of serious political debate. Although some analysts and commentators had from the outset expressed doubts on the long-term sustainability of a currency union, which was not based on political union, or indeed economic integration, the experience of the first decade or so appeared to indicate that there was no cause for concern over the long-term future of the euro (see, however, Arestis and Sawyer, 2003a, 2006a, 2006c, 2012a). But, as will be argued below, problems were bubbling under the surface, which were placing strains on the monetary union; these came to the fore as the ‘great recession’ unfolded, and became clearly obvious as the euro crisis emerged (Arestis and Sawyer, 2012a). The economic performance of the euro area as a whole had, since its formation, been relatively weak (as evidenced below) but not disastrously so, and indeed some of the smaller economies had experienced faster growth (than before the formation of the euro). Inflation and nominal interest rates were lower in many countries as compared with previous experience. There were signs of emerging problems given the persistence of inflationary differentials between member countries, leaving some, notably the southern European countries, in situations of deteriorating competitiveness. The current account imbalances between countries were tending to grow, with substantial capital flows from the surplus countries (mainly northern European, and Germany in particular) to deficit countries (mainly southern European, with Greece and Portugal most seriously affected), and the associated build-up of debts.

The macroeconomic policy framework within which the euro area operated has been subjected to a great deal of criticism from a range of perspectives. From a broadly Keynesian perspective it was the deflationary fiscal policy with limits on national budget deficits enshrined in the Stability and Growth Pact (SGP) that became the focus of intense criticism. But the conditions of the SGP have been breached frequently, notably by Germany and France in the first instance followed by many others. The global financial crisis starting in 2007, and intensifying in 2008¹ with the resultant sharp downturns in economic activity, helped to reveal many of the underlying issues of the euro area. The limits on budget deficits had to be suspended to cope with the sharpness of the downturn. The institutional settings of an independent central bank and the nature of its relationships with national governments (as fiscal authorities) hampered responses to the financial crisis, and later made it more difficult for national governments to fund their budget deficits.

One theme of this book is that the present (2011–13) crisis of the EMU was ‘an accident waiting to happen’ and comes from the interaction of the pressures imposed by the financial crisis with the design of the EMU, and that an economically successful single currency would require major changes in the design of EMU. In chapters 7 and 9 we consider the design changes, which are seen as required for a sustainable single currency consistent with economic prosperity. In this context, design changes may be something of a euphemism – in our view the changes required for a efficiently functioning monetary union involve substantial moves towards what would in effect be a political union, and a complete change in the dominant economic and political ideology which governs the present EMU.

This book seeks to decipher the type of economic analysis underlying the macroeconomic policies of the EMU in terms of its theoretical and economic policy framework. It argues that the challenges to the EMU’s macroeconomic policies lie in their lack of potential to achieve full employment and low inflation in the euro area. It is concluded that these policies as they currently operate have not performed satisfactorily since the inception of the EMU and that furthermore they are unlikely to operate any better in the future; indeed, they are unlikely to save the EMU from continuing crisis. The ways in which the policy framework lies at the heart of the present crisis of the EMU are set out. The book presents some alternatives, which are based on a different theoretical framework, and proposes different institutional arrangements and policies, and which would therefore amount to substantial moves towards a de facto political union.

The EMU was founded in January 1999, simultaneously with the European Central Bank (ECB), and also the European System of Central Banks (ESCB), which includes the central banks of all EU member countries;² with the launch of the single currency (euro) first being introduced as a virtual currency. The euro was established for financial transactions with the exchange rates between those national currencies, which were to be absorbed by the euro, being fixed to six significant figures. At the beginning of 2002 the euro replaced the component national currencies for all transactions for 12 countries, namely Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. This meant that three countries of the then 15 members of the European Union (hereafter EU-15), namely Denmark, Sweden and the United Kingdom, did not join the euro at this time.

The European Union (hereafter EU) expanded in May 2004 with the admittance of ten new member countries, eight from Central and Eastern Europe countries (CEEC) (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia and Slovakia) plus Cyprus and Malta. There was a subsequent expansion with Bulgaria and Romania joining in January 2007, and Croatia joined in mid-2013. Of the new (2004) member states, five have since adopted the euro, namely Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009) and Estonia (2011). In this book our main focus concerns the general issues surrounding the euro and its operation. However, in assessing the economic performance of the countries adopting the euro we focus on the initial 12 members, and we refer to the countries which have adopted the euro as the euro area. When we provide figures on economic performance of the euro area, unless otherwise stated, they refer to the initial 12 members.

In Arestis, Brown and Sawyer (2001) we described the build-up to the formation of the euro, tracing back the various threads leading to the launch of the euro back to at least 1970. In this book we pick up that story again but we move on from there in a significant way.

1.2 Developments in euro area governance

The Maastricht Treaty (formally, the Treaty on European Union, or TEU) was notable for establishing the ‘convergence criteria’ for a nation’s membership of the Economic and Monetary Union. The nature of these convergence criteria in terms of what they included and what they excluded, and their importance, are evaluated in the next chapter. We argue that those ‘convergence criteria’, through the omission of any reference to current account imbalances, to convergence or divergence of business cycles, and the level of unemployment, stored up future problems for the EMU – and it is clear from recent events that they have indeed caused serious problems.

The Stability and Growth Pact (SGP) has, in principle, been the pact governing the operation of the EMU and of national governments within EMU on the fiscal front, though the limits on budget deficits and government debt set out in the SGP have been broken frequently, especially by the powerful EMU member countries. The macroeconomic model, which underpins the SGP, is considered in chapter 3 and the monetary and fiscal policies associated with the SGP are subjected to critical examination in chapters 4 and 5, respectively. The fiscal policy of the SGP was somewhat modified in 2005 with some loosening of the restraints on budget deficits, but there had been no substantial changes until 2011, when measures such as the ‘six pack’ and then the ‘fiscal compact’ were introduced (embodied in the Treaty on Stability, Coordination and Governance, TSCG) and these are discussed in some detail in chapter 5. The ‘fiscal compact’ continues many of the features of the SGP with some tightening of the deficit targets and the ‘excessive deficit procedure’ as well as the intention of stricter surveillance of national deficit positions.

The activities, operations and policies of the Economic and Monetary Union (EMU) and the member countries have been under the direction of a series of treaties usually referred to by the name of the city where the treaty was formulated or signed. Successive treaties have built heavily on their predecessor, although on each occasion significant changes were also involved. The Maastricht Treaty was notable for establishing the ‘convergence criteria’ for a nation’s membership of the Economic and Monetary Union (as set out in chapter 2 below). The Treaty of Amsterdam amended the Treaty of the European Union, the treaties establishing the European Communities and certain related acts, which was signed on 2 October 1997, and entered into force on 1 May 1999. The Treaty of Amsterdam provided a greater emphasis on citizenship and the rights of individuals and some increased powers for the European Parliament. It also contained the beginnings of a common foreign and security policy (CFSP), reinforced in the later Treaty of Lisbon and the reform of the institutions in the run-up to enlargement. The present treaty, labelled the Treaty of Lisbon, was signed in Lisbon by the EU member states on 13 December 2007, and entered into force on 1 December 2009. The Treaty of Lisbon itself followed an ill-fated attempt to introduce a European Constitution. A European Convention, under the chair of Giscard D’Estaing, the then President of France, had been established in 2003 to draw up what was then termed a European Constitution, or the Constitutional Treaty. After a period of consultation, a draft European Constitution was presented for confirmation by nations. The treaty introducing the Constitution was signed on 29 October 2004 by representatives of the then 25 EU member states. The draft constitution ran to some 300 pages covering the full gamut of political, social and economic issues. In debates and discussion over the draft Constitution, a great deal of attention was paid to the relationship between the European Union and the member states and the democratic structures (or lack thereof) within the EU. It was later ratified by 18 member states, which included referenda endorsing it in Spain and Luxembourg. However, the rejection of the document by French and Dutch voters in May and June 2005 brought the ratification process to an end.

In the event, the changes associated with the Treaty of Lisbon were matters such as the creation of a President of the European Union, changes to qualified majority voting and establishment of a Foreign Minister. The parts of the Treaty of Lisbon, which have particular relevance for economic policies, were by and large a ‘cut and paste’ job from the preceding treaty. The Treaty of Lisbon can in many respects be seen as a European Constitution in that the treaty sets out the legal framework within which the European Union operates. In that light there are two significant features for the future development of economic policies. The first is that economic policies are indeed embedded in the treaty. Hence, for example, an ‘independent’ central bank with its operations based on the objective of price stability is contained within the treaty. As we will argue below, this means that a set of economic policies, which were thought suitable at the time of the treaty, are set down ‘in stone’. This leads to the second feature, namely that the Treaty of Lisbon, and hence economic policies and their structures, can only be changed with the unanimous support of all member countries.

A recent important further shift has been the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG),³ which is an intergovernmental agreement signed during 2012 to which we will give much attention below. This treaty is particularly significant for this book as it encompasses the ‘fiscal compact’ as well as calls for ‘structural reforms’, as will be discussed below. It is also significant in that it is an agreement amongst most, but not all, member countries with the UK and the Czech Republic as notable absentees. As such, it sets out a mechanism by which governance can be changed without unanimity of member countries by the use of a Treaty amongst a range of countries.

1.3 The economic philosophy of EMU

In this introductory chapter we seek to elaborate the nature of the economic philosophy which is embedded in the treaty and then to specifically consider the macroeconomic policies that are in the treaty and the problems which arise from them.

We begin with the question as to whether the Treaty of Lisbon can be reasonably described as being neo-liberal in nature. Neo-liberalism involves a focus on the role and extension of trade and markets, international trade without political impediments and private property. This is not to argue that there is a fully coherent policy agenda, and that all policies can fit into a specific policy agenda. It is rather to ask whether the Treaty of Lisbon confirms in place a framework, which is essentially neo-liberal and points to further developments in the neo-liberal direction. As will be seen later there are ‘ratchet’ effects – there is encouragement within the treaty for liberalisation but once liberalisation has occurred there is no provision for deliberalisation if necessary.

The neo-liberal agenda of the Treaty of Lisbon is well illustrated in view of several references to ‘the principle of an open market economy with free competition’ (e.g. Article 119), though many would question whether competition can ever be ‘free’. But later there is reference to ‘a highly competitive social market economy’ (article 3), which in no way defines what is meant by a social market economy, though it is linked with ‘aiming at full employment and social progress’ without considering whether a market economy can ever generate full employment. By implication, there is no indication on which a range of activities will take place outside of the market, or whether the market is to control all of economic life.

For the purposes set out in Article 3 of the Treaty on European Union, ‘the activities of the Member States and the Union shall include, as provided in the Treaties, the adoption of an economic policy which is based on the close coordination of Member States’ economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition’ (Article 119-1). It is also suggested that ‘the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union, in accordance with the principle of an open market economy with free competition’ (Article 119-2; see, also, Article 120).

The Treaty of Lisbon (and to a great extent its predecessors) laid down principles for economic policies (both micro- and macroeconomic ones) and various processes for the coordination of policies between the nation states (within the European Union). On this score, the Treaty of Lisbon states that ‘The Member States shall coordinate their economic policies within the Union. To this end, the Council shall adopt measures, in particular broad guidelines for these policies. Specific provisions shall apply to those Member States whose currency is the euro. The Union shall take measures to ensure coordination of the employment policies of the Member States, in particular by defining guidelines for these policies’ (Article 5). In the area of social policies it is a looser arrangement in that ‘The Union may take initiatives to ensure coordination of Member States’ social policies’ (Article 5).

Within the EU, and this is reflected in successive treaties including the Lisbon Treaty, the assignment of a range of ‘competencies’ with regard to policy areas to the EU itself and others remaining with the member states.

In this section we briefly set out what the current position is with respect to those competencies and the related issue of subsidiarity. This is a prelude to subsequent discussion. In the economic sphere there were no proposed shifts of a similar magnitude. But our concern here is not centred on the relative powers of nation states and the EC per se. Our concern is rather twofold: (i) what is the nature of the coordination of economic decision-making which emerges? How far is the coordination in effect undertaken through a single central body (the extreme case being the European Central Bank, which could be said to coordinate interest rate policy across all members of the euro area through the imposition of a single interest rate and how far is the coordination undertaken by member states)? Then how effective is that coordination and does it meet the requirements needed for the successful operation of a single market and for the countries involved for the single currency? And (ii) in terms of the economic policies, pursued at the EU level and in terms of those policies, which are coordinated through actions of the member states, what is the ‘model’ which governs those policies? In any federation or federal state there are many issues of the relationship between the members and the centre.

A currency area is in general also a nation state, and hence the currency area is also a political union. A central feature of the EMU is that it is a currency union but not a political union. Within a political union, there are economic and social policies implemented at the level of the political union, and others that fall within ...