OeNB Seminar

Es gilt das gesprochene Wort.

Is European economic and monetary policy co-ordination efficient?

One year ago, some economists were fast to attribute the then low external value of the euro to the lack of an institution clearly in charge of formulating coherent economic policies in the Euro-zone. As the present situation clearly reveals, there might not be such a chain of cause and effect, as we cannot deduce from the current high exchange rate level vis-à-vis the Dollar that meanwhile, a strong co-ordination centre emerged. 

Similarly, the fact that currently three countries (P, D, F) exceed the 3% deficit limit does not mean that the Stability and Growth Pact failed to do its job. Other than assumed by the manifold critics of the Pact, who see these problems as a result of such perceived flaws as the Pact’s rules without economic logic, the one-size-fits-all approach of the reference values, or the failure of peer pressure, the problems come from sluggish growth and national policy failures. Germany’s cost of unification and its pro-cyclical tax reform are but a case in point. The correct question is thus, what would have happened without the Pact? In this regard, the 1991 recession and the then level of deficits could serve as an illustration. 

A third point: The quality of a policy regime should be assessed over the entire business cycle. The start of EMU in 99 brought about and/or coincided with favourable economic conditions such as low inflation, high growth, absence of major shocks. But the euphoria is over, and challenges lie ahead. The key question is whether the current form of co-ordination is to be blamed for the gloomy growth outlook. In other words: could the current economic situation have been avoided by a better, more efficient system? There are different answers to this, depending on whether one believes in the efficiency of soft co-ordination policy regimes with intra-systemic competition as implemented by the peer review and benchmarking system of Lisbon under the Open Method of Co-ordination, or whether one sees the future in a further strengthening of an economic policy co-ordination centre for the Euro-zone. 

My answer to these questions is the following: In a single market with a single currency, the range for efficient independent national policy decisions is reduced and the scope for both positive and negative externalities significantly enlarged. Co-ordinated economic policy becomes a public or collective good. As a result, member state economic policies have to be more closely aligned. There is also an economic case for an additional policy mix between fiscal and monetary policies, as only with participation of the ECB, utility for the euro area can be maximised. Indeed, coordination of fiscal policy alone, without a participation of the ECB, is counterproductive. 

The institutional separation of policy-making and the dominant position of the single monetary policy vis-à-vis fragmented fiscal policy made Austria use its Presidency in 1998 to focus on a mutually supportive interaction between fiscal policies, on the one hand, and monetary policy, on the other hand. This came into live under the German Presidency as the Cologne Process, an informal dialogue including the social partners in order to get a hold on wage developments. As a means to exchange information and foster better understanding, it is clearly positive. Yet, it is a "dialogue" and, as such, cannot solve the underlying problem. 

Different actors underscored the need to press ahead with strengthening coordinating arrangements: the European Council of Helsinki in December 1999, the Commission, the EP, or the national governments represented in the Euro-group. Progress has been made on such issues as the range of topics discussed in the Eurogroup, its structure and preparation, the agreement on a Code of Conduct and other refinements concerning the implementation of the SGP, the streamlining of Broad Economic Policy Guidelines and their co-ordination with the Employment Guidelines, or the composition of the Economic and Financial Committee. Yet, many improvements were purely technical. 

The difficulty lies in maintaining a balance between centralism and decentralisation, where the need of a strong centre conflicts with the need to give up national economic sovereignty culminating in a further constraint of the remaining powers of national parliaments. The current system of co-ordination, which more precisely should be called a system of co-operation, respects those fears. However, it has already reached its limits, as it cannot be indefinitely refined and expanded. Any further step, as for instance the establishment of a true steering centre, will inevitably, sooner or later, cross the invisible line. The hesitation to do so and go beyond the limits of the national constitutions makes EMU similar to the CFSP, and explains why it was seen as a "metaphor" for the European Union. 

We should not forget that EMU – implicitly – was envisaged as a vehicle for political integration. It is the lacking of an explicit agreement on this central feature which makes any progress difficult, renders reforms to a large part cosmetical, and leaves us with a complex system consisting of a myriad of stronger and weaker forms of co-ordination. Its major problem: it is structurally unable to deliver a coherent macroeconomic policy mix. It can maintain stability, but it cannot actively pursue growth-enhancing strategies. 

Does an enlarged Union call for new and/or adaptation of policy instruments? 

Enlargement warrants a fresh look at the structure of economic policy in Europe, given that Euro-zone countries will soon be in the minority. As the Commission in its report to the European Convention put it, "Authorising the Member States of the euro zone to decide among themselves on issues concerning their currency is a matter of straightforward common sense." 

The legal and institutional reforms that will be needed if coordination is to be enhanced were subject to discussions in the Convention and in the EFC, Euro-group and ECOFIN. The Austrian position in this process has been reform-oriented. It envisaged: 

Enabling Euro-Group to take decisions which relate to the Euro and economic policy co-ordination;
Strengthening the Commission’s role in the SGP and the Early Warning Mechanism to render the procedure more efficient and unbiased;
Enhancing the external visibility and coherence by installing a Euro-Group President elected for two years;
Better involving the EP and national parliaments to enhance the transparency of the co-ordination process and ownership.


The recommendations of the Convention, in that respect, are a step in the right direction. It is a timid one, though, and we will have to take care that it is not turned in a step backwards in the negotiations that will follow. 

How to improve ownership by Member States? 

It should have become clear that there are four developments that we need: 

First, the Euro-Group as an efficient centre of economic policy co-ordination and counter-weight to the ECB,
Second, an external presence, based on
Third, a coherent macroeconomic policy which is strategic in the true sense of the word,
Coupled with, fourth, faster short-term decisions – e.g. on tax issues or financial market integration. 

The economic players need a level-playing field. Once achieved, ownership will follow.