Economic Policy Coordination in the EMU: Implications for the Stability and Growth Pact

Abstract

The new policy regime of EMU justifies to raise the old question whether policy coordination makes countries better off. On the one hand the Maastricht Treaty demands economic policy coordination in Article 99.1 On the other hand the division of responsibility of economic policy making in EMU is unique. An independent European Central Bank (ECB) is responsible for the monetary policy for Euroland, whereas the EMU member countries still are the indivudal actors of the fiscal policy. However, the Stability and Growth Pact (SGP) limits fiscal expansion. These specific rules of the policy game imply different combinations for possible cooperations: either the EMU member countries cooperate in pursuing their fiscal policy and/or they cooperate with each other and with the ECB. So far, however, due to the strong independence position of the ECB it refused to cooperate with the national governments. The primary target for the ECB is to maintain price stability. Presently the most urgent target for the EMU member countries is full employment. However, reading the Articles of the TEC concerning coordination and those of the SGP (in particular Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and “coordination” of economic policies) one gets the impression that coordination in the EMU primarily has a negative or passive connotation (medium-term objective of “sound budgetary positions close to balance or in surplus”). Normally, economic policy coordination aims at improving the economic position of a group of countries (positive or active connotation).