The Assessment: EMU, Four Years On

Abstract

This paper reviews the functioning of the Economic and Monetary Union over the first 4 years of its existence. Monetary policy is viewed as having been of the ‘inflation‐targeting’ type, but with a tendency towards delay and conservatism in adjustment, which may also reflect over‐optimistic output growth forecasts. The resulting pressure on the Stability and Growth Pact (SGP) illustrates the weakness in the ‘consensus view’ of the harmonious interaction of monetary, fiscal, and supply‐side policies, which requires policy in all three areas to be ‘correct’. In discussing reform of the SGP, a looser but still constraining form of fiscal agreement is advocated. The supply‐side and balance‐of‐payments issues involved in inter‐country adjustment also interact importantly with the SGP and are identified as key areas of difficulty in a still ‘immature’ monetary union, with separate labour‐market structures. Here the mechanisms for coordination are more or less absent.