EMU Policies and the Stability and Growth Pact: Prospects of Macroeconomic Stability

Abstract

One of the challenges of the Economic and Monetary Union (EMU) is achieving a balanced sustainable expansion of economic activity conducive to macroeconomic stability and financial sustainability of the EMU. In the paper, we evaluate the EMU policies for their effectiveness of smoothening economic cycles in the aggregate. We discuss the pros and cons of the policies and explore the extent to which the EMU institutional framework is likely to facilitate endurance for responding to potential economic shocks and future challenges of the EMU. The paper reveals that the EMU needs a system of credible coordination of monetary and fiscal policies that address economic goals other than price stability. The extent to which EMU policies allow for structural reforms of labor, capital, and product markets will mark the level of responsiveness of the system to handle potential economic disturbances and asymmetric shocks in the Euro region.