Alternative Economic Policies for the Economic and Monetary Union

Abstract

The problems of the euroarea stem from design faults of the EMU with current account imbalances, differential inflation, and a poor macroeconomic framework, and failures to accommodate differences in institutions between the member countries. The design of the ‘independent’ European Central Bank has largely precluded the necessary co-ordination of fiscal and monetary policy, and has also disabled the central banking system from providing sufficient support to national governments and their budget deficits. Little regard was paid to issues such as convergence of business cycles and economic conditions between potential member countries (with its implications for the operation of a ‘one size fits all’ monetary policy). No attention appears to have been paid to the institutional differences between member countries with respect to how labour markets, housing markets, banking system etc functioned and operated. The paper outlines a set of alternative policy proposals for the Economic and Monetary Union. These proposals are very far removed from the present policy positions, and remote from what could be viewed as politically feasible. The proposals would require significant income transfers between countries through the development of a Federal tax system and social security system. The policy framework seeks to specifically address the malfunctioning of the Economic and Monetary Union, and as such do not address the relationship between EMU member countries and the other member countries of the EU. The proposals are put forward to illustrate a different direction of travel.