Reforming economic governance in Europe: exploring the road to effective coordination

Abstract

The European Union is at a crossroad. In recent years it has been going through a major review of its institutional design without, however, clearly defining its role and scope. The credibility of its institutions is adversely affected by the widening gap between ambitious economic goals and the dismal performance of the economy in some member countries. Structural reforms have been progressing at a painfully slow pace. Popular support has been decreasing alarmingly. The need to confront poor economic performance and to embark on urgent market-structural reforms, as well as the problem of harmonizing national interests with those of the EU as a whole, have highlighted how the institutions and processes can be dovetailed. This article aims at contributing to the debate on economic governance and policy coordination in Europe. Looking at the genesis and the recent reform of the Stability and Growth Pact, it focuses on how the European Monetary Union macroeconomic policies are likely to be governed in the future and what the possibilities are for establishing effective economic and monetary governance. The Pact represents the most developed, albeit controversial, attempt to provide a framework for coordination of policies among sovereign states. Such coordination should help to achieve an appropriate fiscal–monetary mix, enhancing the credibility of monetary policy by insisting that member states governments do not spend more than they can finance through taxation. The Pact's recent revision is certainly the first step in the right direction, especially because it links macroeconomic stability with the goals of the Lisbon Agenda–job creation, market-structural reforms and social cohesion.