Economic And Monetary Union Research Articles

Signaling virtue or vulnerability? The changing impact of EMU on government bond spreads

Abstract Do bond-spreads of developed countries behave differently under different exchange-rate regimes? Focusing on the experience of European monetary integration, we find that the impact of exchange-rate regimes on spreads depends on the macroeconomic context. When inflation counted as the greatest risk to bondholdings, Economic and Monetary Union (EMU) was advantaged over flexible and fixed exchange rates, because of its in-built inflation-control mechanisms. Since debt-sustainability became the primary risk, exchange-rate rigidity has been a liability because it constrains governments’ response to adverse shocks. Employing a moving-window analysis for 12 EMU-members plus 10 ‘comparators’, we find that inflation was penalized under flexible and fixed exchange-rate regimes, but not under EMU. From the early 2010s on, inflation carried no penalty under any exchange-rate regime. Debt and deficit did not affect spreads until the late 2000s. Since then, EMU-members incurred larger and more prolonged spreads penalties for deficits and debt than countries in other exchange-rate regimes.

Spór między Komisją Europejską a rządami państw członkowskich o model reformy ustrojowej Unii Gospodarczej i Walutowej w latach 2010-2023

DISPUTE BETWEEN THE EUROPEAN COMMISSION AND THE GOVERNMENTS OF MEMBER STATES OVER THE MODEL FOR THE SYSTEM REFORM OF THE ECONOMIC AND MONETARY UNION IN THE YEARS 2010-2023 The primary research objective of the article is to analyze the System Reform of the Economic and Monetary Union (EMU) from 2010 to 2023 from the perspective of the dispute between the European Commission and the governments of Member States over the model of this reform. The author formulated two research hypotheses. The first one is based on the assumption that the implementation of the reform faced numerous difficulties and barriers resulting from the negative attitudes of the governments of some Eurozone member states towards the implementation of selected projects of the European Commission, but also from the accumulation of several international crises that the European Union was facing at the time. These were the migration crisis in 2015-2016 and then from 2022, the pandemic crisis in 2020-2021 and the geopolitical crisis caused by Russia’s aggression against Ukraine from 2022. The second hypothesis is that the main axis of disagreement between the Commission and the governments of Member States was the limits of financial solidarity and the target System Model of the EMU. Following this, the author formulated four research questions: (1) On which issues did the positions of the European Commission and the Eurozone Summit converge and on which issues did they diverge, and why? (2) To what extent did disagreements between Member State governments over the limits of financial solidarity and the target integration model of the EMU determine the direction of System Reform? (3) How important were the aforementioned international crises for the fate of the reform? (4) What were the main achievements and failures of the EMU System Reform?

From Menace to Mundane: Moral Hazard and the Politics of the European Central Bank's Government Bond Purchases

AbstractDuring the Eurozone's sovereign debt crisis, the ideational consensus that shaped the foundation of Economic and Monetary Union (EMU) was destabilized by disagreement on unconventional monetary policies (UMPs), specifically government bond purchases. In the ECB's 2021 strategy review, however, UMPs were confirmed as standard elements of the European Central Bank's (ECB) toolbox. What happened? One argument frequently presented to question the legitimacy of UMPs is that they undermine the prior objective of the EMU of avoiding moral hazard. We analyse the politics of UMPs by focusing upon how top officials in four major Eurozone central banks have discursively constructed the relationship between the ECB's purchase of sovereign debt and moral hazard. We find that top central bank officials aligned to a large degree on the non‐necessary causal relationship between government bond purchases and moral hazard, which reinforced its legitimacy and eventual acceptance as ‘conventional’.

Monetary Integration Effects on Foreign Direct Investments in New EU Member States

This study examines the impact of accession to the Economic and Monetary Union (EMU) on foreign direct investment (FDI) inflows in the 11 New Member States (NMS), during the period 2005-2018. Using panel regression analysis and the gravity model, the influence of macroeconomic indicators on FDI outflows from 21 industrialised countries (including EU and non-European counties, such as Japan and USA) to the NMS is assessed. The empirical results suggest that favourable macroeconomic indicators in the NMS, such as a stable exchange rate, lower inflation, long-term interest rates and EU/EMU membership, are positively correlated with FDI inflows from NMS. Conversely, rising inflation and exchange rate volatility in the NMS are negatively associated with FDI inflows, while inflation in the FDI origin countries is positively correlated with investment in the NMS. The results suggest that joining the EMU has a statistically significant and positive relationship on FDI inflows to the NMS.

Legacy and Limits of NGEU

This contribution will analyze the significance and legacy of Next Generation EU (NGEU). It will start by providing a snapshot of the state of the EU's Economic and Monetary Union (EMU) before the pandemic struck in 2020. It will then map out NGEU's likely legacy, arguing that NGEU may change the way the EU raises and spends revenues in the future. The essay will finish by reflecting on how NGEU may change our interpretation of important elements of EMU and affect the ongoing debate about the future of fiscal integration within the EU.

Stable support, scant initiative: European business associations and Economic and Monetary Union, 1946–1992

The article investigates the views of European business associations on the Economic and Monetary Union (EMU) project between 1946 and 1992. In doing so, it places the campaign for EMU organised by the Association for the Monetary Union of Europe in the run-up to the Maastricht Treaty into its previously neglected historical context. The article argues that although European business associations supported EMU in general, their views concerning its construction evolved and differed. As a result of these divergences, they only responded to political proposals made by others, instead of pro-actively pushing a specific agenda forward.

The Evolution and Challenges of the EU’s Fiscal Policy Framework: A Critical Analysis

The European Union’s fiscal policy framework has undergone significant evolution and faced numerous challenges since the establishment of the Economic and Monetary Union (EMU). This essay critically analyzes the development, reforms, and critiques of the EU’s fiscal rules, particularly in light of the sovereign debt crisis and the recent pandemic. Initially, the EMU focused little on fiscal integration, but the subsequent two decades have been marked by expansion and crisis management, with key reforms such as the ‘Six Pack,’ the Treaty on Stability, Coordination and Governance (TSCG), and the ‘Two Pack’ aiming to stabilize the EMU and prevent unsustainable public finances. Despite these efforts, the EU’s fiscal rules have been criticized for their complexity, rigidity, and lack of enforcement, leading to ineffective fiscal management. The Maastricht Treaty’s fiscal cap and public debt target, operationalized through the Stability and Growth Pact (SGP) since 1999, have been particularly scrutinized. Current proposals for reforming the EU’s fiscal framework are seen as insufficiently simple, flexible, and effective, potentially leading to unintended negative consequences. The essay also examines the role of the European Banking Union (EBU) in the fiscal policy framework, established in response to the financial crisis and designed to ensure the soundness of Europe’s financial sector. The EBU, with its Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM), plays a critical role in preventing banking sector problems from causing financial distress in EU countries.

The term structure of yield curve and connectedness among ESG investments

We examine the connectedness of different components of the US treasury’s term structure with ESG (Environment, Social, and Governance) leader indices regarding return and volatility. The EMU (Economic and Monetary Union) and the UK lie at the center of the network. The connectedness is time-varying and versatile regarding return- and volatility spillovers and various components of the US treasury yield curve. The long-term rates influence returns, whereas the short- and medium-term are dominant regarding volatility spillovers. Interestingly, both return- and volatility spillovers from the yield curve components change behaviors/directions during the GFC and COVID-19. Importantly, long-term interest rates are significant shock transmitters during times of stress. Our findings have implications for ESG investors, who should keep in mind the shape of the yield curve while making portfolio choices and investment-horizon decisions.

Stanowisko Komisji Europejskiej oraz rządów państw członkowskich Unii Europejskiej wobec reformy ustrojowej Unii Gospodarczej i Walutowej (2017-2022)

This article aims to analyse the positions of the European Commission (EC) and the governments of the EU Member States regarding the system reform of the Economic and Monetary Union (EMU). This analysis leads the author to the following conclusions. First, the EC has consistently advocated the creation of three new structures within the existing EMU by the end of 2025 (i.e. the Financial Union, the Fiscal Union and the Economic Union) and a radical extension of the powers of the EU institutions in the financial, fiscal and economic policies of the Member States. On the other hand, some EU Member State governments, notably Germany, Austria, the Netherlands, Denmark and Sweden, were opposed not only to such far-reaching system reform, but also to the pace of its implementation. All the draft laws of the EC went much further than the proposals of the Eurozone Summit or the Eurogroup in terms of system change. Thirdly, the attitude of the Eurozone Member States themselves towards the reform examined was not uniform. While the southern eurozone countries, led by France and Italy, believed that financial solidarity within the eurozone should be understood in the broadest sense, the northern eurozone countries, led by Germany, opposed it. As a result, the differences of opinion between the EU Member States were compounded by controversies between the Eurozone countries, which further complicated the process of reforming the EMU system. Fourthly, the reorientation of the stance of the governments of Germany, Austria, the Netherlands, Denmark and Sweden towards a communitisation of debt in 2020 and 2021, illustrated by the example of the Reconstruction Fund, did not pave the way for resolving the long-standing dispute over the establishment of a European deposit guarantee scheme.

Positive externalities of the EU cohesion policy: Toward more synchronised CEE countries?

AbstractThe aim of this paper is to examine the role of the payments from the European Cohesion Policy (ECP) in the business cycle synchronisation of the EU–28 countries in the time period 2000–2016. The emphasis is especially placed on the Central and Eastern European (CEE) countries, given their status as the biggest ECP recipients; we investigate whether the ECP can serve as an instrument to promote their synchronisation which presents one of the prerequisites for the adoption of common monetary policy in the Economic and Monetary Union (EMU). By applying a panel instrumental variables estimation, our results suggest that the ECP provides a positive externality regarding increased synchronicity in the EMU, suggesting that the ECP should be further strengthened to foster business synchronicity in the Euro Area. Further analysis reveals that the systematically identified driving forces are the European Regional Development Fund (ERDF) and the Cohesion Fund (CF). The current European recovery plan ‘Next Generation EU’ could, therefore, have a promoting effect on the EMU’s monetary policy if it is designed as an additional structural investment fund promoting financial and trade integration.

European Public Policies and Sovereign Risk in the Eurozone: How State-Contingent Governance Hampers Fiscal Discipline

Abstract The 30 years old Maastricht Treaty on European Union (EU) is based on the political vision that a stable euro requires sound budgetary policies and sustainable public finances in all the participating countries. This article reviews how the European framework for managing sovereign risk in the Economic and Monetary Union (EMU) has evolved in challenging times. The main finding is that over the years European policymakers have applied a range of special provisions contingent on the state of national economies, the demand for public investment, the need for a sound financial system, the effectiveness of monetary transmission, or on general concerns with the integrity of the eurozone, in a way which hampers fiscal discipline. The growing prominence of this state-contingent governance could mark the political transition from the Maastricht Treaty’s focus on public risk reduction to a ‘Next Generation EMU’ which favours public risk sharing. The challenge in designing the future EMU architecture will be to balance the need to preserve the integrity of eurozone with the need for fiscal discipline.

EU or Euro Area Crisis? Studying Differentiated Integration as an Idea Structuring Elite Perceptions of the Sovereign Debt and the COVID-19 Crisis

ABSTRACT After the sovereign debt crisis, scholars concluded that euro area member states (EAMS) and non-EAMS embarked on diverging paths of integration. Yet, their united response countering the economic consequences of the COVID-19 crisis contradicts the path-dependency argument. This article takes an ideational approach. It demonstrates that the different crisis outcomes regarding differentiated integration (DI) in Economic and Monetary Union (EMU) coincide with variations of how DI influenced elite crisis perceptions as an idea. While policymakers perceived the sovereign debt crisis as a currency area crisis with threats and spillovers applying to EAMS, they interpreted the COVID-19 crisis as a health emergency threatening all EU member states. These differences in elite crisis perceptions facilitated different outcomes regarding DI despite unchanged economic and fiscal circumstances among EAMS and non-EAMS. The findings challenge deterministic assumptions on the self-reinforcing nature of DI in EMU and establish DI as an idea structuring elite perceptions.

How quantitative easing changes the nature of sovereign risk

We model the market stabilization function of quantitative easing (QE) programs as a put option written by the central bank to bond holders. This implicit put option protects bond holders against tail risks, in particular sovereign credit risk. The contingent claims model (CCM) that we use to value the implicit put option has not been applied to QE in the literature before. Based on this model, we examine the effect of the European Central Bank’s bond purchases by QE on the sovereign credit risk of eight countries of the Economic and Monetary Union (EMU). Model simulations show that in times of market stress investors attached a high value to the implicit put option on sovereign bonds. This indicates that QE lowers investors’ perception of sovereign default risk. Understanding this effect of QE is important for addressing tail risks in the euro area via a backstop facility.

Continuity despite crises: Germany’s euro policy in the light of the pandemic, war and inflation

ABSTRACT After a decade of reforming and stabilising the Economic and Monetary Union (EMU), it has been put to a triple test: the COVID-19 pandemic, the war in Ukraine, and the return of inflation have posed serious challenges to the eurozone that call for policy responses. Against the background of recent advances in European integration theory, we assess whether and how these challenges have led to a change in the EMU policy of the eurozone’s most powerful member, Germany. We conceptualise three ideal-typical policy options for Germany to deal with EMU’s challenges and we search for traces of policy learning from past eurozone crisis management. On the basis of semi-structured interviews with German political elites, we cannot identify any significant change in Germany’s EMU policy. We conclude that the unwavering continuity of Germany’s euro policy makes further substantial integration in EMU unlikely.

Is the road to hell paved with good intentions? An empirical analysis of budgetary follow-up in the EU

We study the one-year-ahead budgetary projections from the Stability and Convergence Programmes (SCPs) of EU Member States since the start of the Economic and Monetary Union (EMU) until the start of the coronavirus crisis. First, we consider errors of the general government’s headline budget balance, which we then split into expenditure and revenue errors. Next, we split the latter two into “base”, “growth” and “denominator” effects. We find that the most important explanatory variable is the GDP growth error: more optimism in GDP growth projections produces more optimistic budgetary projections. This effect goes beyond a mechanical denominator effect on spending and revenues as shares of GDP; it also works through the numerator of these ratios. Our findings may call for delegating the construction of output projections to adequately equipped national independent fiscal institutions. Finally, we explore how independent fiscal institutions shape projection errors. Those with high media impact producing or assessing the macroeconomic forecast appear to lead to actual budgetary improvement relative to projections.

The Economic and Monetary Union (EMU): status quo and the way forward

The present paper, structured in three sections, contains a brief presentation and analysis of the foundations and development of the European Economic and Monetary Union (EMU) and of the policies implemented therein. Section A (“Key Design Elements of the Economic and Monetary Union (EMU)”) sets out the institutional foundations of the EMU. The following Section B (“The Impact of the Four Major Crises During the Period 2007-2022”) develops, through the lens of the (2007-2009) global financial crisis (GFC), the subsequent fiscal crisis in the euro area, the pandemic crisis and the recent (since 2022) inflation crisis, on three aspects: how the single monetary policy by the European Central Bank (ECB) within the Eurosystem has been implemented; how the Economic Union has been strengthened (inter alia, regarding sovereign crisis management); and what is the role of the ECB, beyond the exercise of its monetary policy and other basic tasks within the Eurosystem, within the European System of Financial Supervision (ESFS) and the first pillar of the Banking Union (BU), which were, respectively, “children” of the two first above-mentioned crises. Finally, Section C (“The Way Forward”) discusses current trends and developments in relation to the implementation of monetary policy; the ongoing reform of the economic governance framework and the link between monetary and fiscal policies; as well as the ‘unfinished’ agenda in relation to the Banking Union.

Monetary and fiscal policies in the EU. Is there a difference between EMU and non-EMU members?

AbstractThe COVID-19 crisis has put the European Union's (EU) ability to respond to external challenges to test. It is not a new issue that has arisen due to the current crisis. The global economic crisis of 2008, and, in particular, the sovereign debt crisis of 2010, highlighted the need for institutional, policy and political reform to ensure the stability and long-term sustainability of the EU project. The EU's asymmetric degrees of integration, in terms of Economic and Monetary Union (EMU) and non-EMU members, resulted in a diverse response to the crisis and, more importantly, mixed-effects from monetary and fiscal policies. This study aims to research the impact of monetary and fiscal policies between 2007 and 2015 on economic growth and employment. The findings show that loose monetary policies at the EU, EMU and non-EMU levels boosted economic growth and development. On the other hand, restrictive fiscal policy had favourably influenced GDP and employment by reducing inflationary pressures produced by expansive monetary policy. However, fiscal policy had a greater impact in the non-EMU countries, demonstrating that this policy can act as a stabilizing force in the face of an overly expansive and common monetary policy. In order to respond effectively to the current and future crises, the EU government should overhaul the way monetary and fiscal policy is conducted and coordinated.

Errors and Challenges Associated with Investing in EMU Government Bonds

This article highlights some of the main practical errors and challenges associated with investing in Economic and Monetary Union (EMU) government bonds and the difficulties in implementing EMU government bond strategies. These challenges refer to both portfolio allocation and to factor bond portfolios. Different country economic fundamentals, central bank policy, market timing, market risks, model and management risks, liquidity, and idiosyncratic country risks as well as spillover effects should be considered when investing in individual EMU government bonds. These essential properties of EMU bonds are not adequately addressed in portfolio allocation models (e.g., the tracking error or the mean–variance optimization) applied to single bond portfolios from equity investing. The main EMU government bond disparities are associated with country risks, which can be generalized to the main difference between core and periphery country yield spreads.

Deutschland als Hegemon in der Eurozone? Der „bestimmende Einfluss“ der deutschen ordoliberalen Ideologie

Since the outbreak of the Euro crisis, there has been a renewed interest by scholars in Germany’s role and power within the European Union (EU). In this broader debate the concept of a German hegemony came to the fore. A full analysis on whether Germany is the EU hegemon is beyond the grasp of a single article. Instead, this text focuses on one of the dimensions of hegemony – ideational power – within a key policy area of the EU where, arguably, German power has been felt more strongly: the Economic and Monetary Union (EMU). The article argues that German ideational power and its embeddedness within the EMU had a “bestimmender Einfluss” on the outcomes of the Euro crisis, meaning there is a case to be made for a German hegemonic role in the EMU.

Peace, Prosperity and Protection: Narratives of Integration and the ‘Justification Jungle’ of Europe's Public Spheres

AbstractThe European Union (EU) is in search of a new narrative to create a sense of common purpose, but it is unclear around which values that narrative should be built. To analyse how different narratives resonate in Europe's public spheres, this article presents a novel dataset based on claims analysis of newspaper articles from Germany, France, Italy, Spain, Poland and Denmark between 2012 and 2019 on the issues of migration, the Economic and Monetary Union (EMU), trade and counterterrorism. Descriptive and logistic regression analyses show how different frames have been used for various policy agendas. This reveals considerable variation, but comparatively low levels of explained variance. Europe's public spheres can thus be described as a ‘justification jungle’, where many actors use a range of arguments to back up diverging political demands. This poses a formidable obstacle to any single narrative of European integration.