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Chapter 4: Restoring Convergence between Member States in the EU and EMU
3.1. The specificities trade integration (see, for instance, Krug - especially if they were in the periphery
of a monetary union man 1993) ( ), as well as heterogeneity of the Community, to the highly devel-
25
in the development of real interest rates oped areas in the centre’. They also note
The capacity to adjust (see, for instance, ESDE 2013). that the Report ‘emphasised the need to
to asymmetric shocks in the EMU “equalise production conditions” in the
In such an environment, the fiscal Community by strengthening EC cohe-
In an economic and monetary union with capacity of the currency union level sion policies and developing major EC
irreversible nominal exchange rates, is an important factor in terms of the investment programmes in areas such
the available channels for adjustment system’s ability to alleviate the eco- as physical infrastructures, communi-
to asymmetric shocks at the Member nomic and social impact of asymmetric cations, transportation and education’
State level include, on one hand, market shocks. Under the current architecture of and ‘stressed the need to ensure the
based channels such as wages, prices, the EMU, however, adjustment relies on “efficient use” of EC cohesion funds, the
labour mobility (geographic and occu- decentralised fiscal policies under a rule- performance of which had to be evalu-
pational), and private capital flows, and based framework and does not provide ated and “if necessary be adapted in
on the other hand, policy based chan- for an (automatic) fiscal stabilisation the light of experience”’. The Commis-
26
nels including fiscal policies such as capacity ( ). Furthermore, while social sion’s Blueprint for a deep and genuine
automatic fiscal stabilisers, discretionary protection generally played a prominent EMU (2012), the Four Presidents’ report
taxes and public expenditure. And by con - role in compensating households’ income (2012) and the Commission Communica -
struction, they do not include monetary losses in the early phase of the crisis tion on strengthening the Social Dimen-
policy instruments (such as open market (2008–9), and thus helped stabilise the sion of the EMU (2013) stress that the
operations) or the possibility of adjusting economy, this capacity was eroded in the creation of an EMU-wide fiscal capacity
nominal exchange rates. second phase of the crisis (particularly in should be considered as a longer-term
2012 and 2013). This was due to a num - step to improve the stabilisation of EMU
The absence of national monetary pol- ber of factors, including high pre-existing economies, particularly in case of asym -
icy instruments and nominal exchange levels of sovereign debt and protracted metric shocks.
rates, combined with downward rigid- uncertainty about the EMU’s future, lead -
ity in prices and wages, requires addi- ing to cuts in public spending and/or tax It should also be underlined that, as
tional adjustments through quantities increases in many Member States ( ). stated in the Blueprint for a deep and
27
(including raising unemployment and genuine EMU (2012), such developments
decreasing real income) when a national The importance of a common fiscal relate to a medium- and long-term vision
economy is hit by an adverse asymmetric capacity at the monetary union level of the EMU and are thus complementary
shock. This is especially the case when had already been recognised in the to existing measures to improve policy
access to capital markets is limited, so early stages of European monetary pol- coordination, in particular implementa-
that the adjustment burden cannot be icy cooperation, such as in the Marjolin tion of the economic governance frame -
spread over time. Report in 1975, the MacDougall Report work, as well as developments relating to
in 1977 and the Delors report in 1989. the Banking Union, while they also imply
In addition, such a limited adjustment Enderlein and Rubio (2014) underlined a greater degree of sovereignty transfer
capacity can generate strong adverse that the Delors report considered that and hence should be accompanied by
socioeconomic consequences (such as ‘a well-functioning economic pillar was steps towards political integration.
distributional impacts, hysteresis effects, needed to limit the scope for diver-
and interactions with product markets, as gences’, requiring common regional and Available estimates of the level of risk
discussed below), which may generate structural policies and macroeconomic sharing (smoothing capacity against the
self-reinforcing adverse labour market policy coordination and that ‘more effec - impact of country specific shocks) overall
developments that increase the duration tive EC structural and regional poli cies in Europe suggest that it remains low,
and intensity of an economic downturn, were seen as indispensable to mitigate compared to Canada or the United States
with the risk of a permanent loss of the negative effects that economic and (see Allard et al. (2013) and Van Beers
potential output and employment. monetary integration was expected to et al. (2014)). It appears that the rela-
have on poorer regions’. In particular, it tive weakness of risk sharing in Europe
It is worth noting that since the intro- was feared that agglomeration effects and EMU does not derive from the credit
duction of the euro, there appear to be would ‘favour a shift in economic activ- markets, but is mainly due to lower risk
at least as many asymmetric shocks ity away from less developed regions, sharing in the capital market channels
as before (such as, for instance, meas- (which remains weak) and fiscal trans-
ured by the dispersion in growth rates; ( ) See Section 2.2 below. fer channels (which are comparatively
25
see, for instance, European Commission ( ) The EU budget contributes to stabilising inexistent, see chart). In this respect, the
26
(2008), Pisani (2012) and Allard et al. national budgets only in a marginal way, Banking Union should strengthen the
namely through slightly lower national fiscal
(2013)). While a number of factors affect contributions due to lower imports (tariffs) capital market and depreciation chan-
trends in business cycle synchronisation, and economic activity (VAT) and through nels, while the argument that its credibil -
reduced requirements for co-financing
increased trade integration can lead to of European Structural and Investment ity and efficiency would be strengthened
28
more synchronisation of the business Funds’ support (in the case of ‘programme by a fiscal backstop should be noted ( ).
countries’). The European Globalisation
cycle (see, for instance, Frankel and Rose, Adjustment Fund, outside the MFF, provides
1998), while there are other forces that small-scale financial assistance in case of
regional economic shocks.
28
reduce synchronisation, such as increas - ( ) See, for instance, EU Employment and Social ( ) See, for instance, IMF (2014), Article IV
Consultation with the Euro Area — Staff
27
ing economic specialisation linked to situation, Quarterly review, March 2014. report.
219
3.1. The specificities trade integration (see, for instance, Krug - especially if they were in the periphery
of a monetary union man 1993) ( ), as well as heterogeneity of the Community, to the highly devel-
25
in the development of real interest rates oped areas in the centre’. They also note
The capacity to adjust (see, for instance, ESDE 2013). that the Report ‘emphasised the need to
to asymmetric shocks in the EMU “equalise production conditions” in the
In such an environment, the fiscal Community by strengthening EC cohe-
In an economic and monetary union with capacity of the currency union level sion policies and developing major EC
irreversible nominal exchange rates, is an important factor in terms of the investment programmes in areas such
the available channels for adjustment system’s ability to alleviate the eco- as physical infrastructures, communi-
to asymmetric shocks at the Member nomic and social impact of asymmetric cations, transportation and education’
State level include, on one hand, market shocks. Under the current architecture of and ‘stressed the need to ensure the
based channels such as wages, prices, the EMU, however, adjustment relies on “efficient use” of EC cohesion funds, the
labour mobility (geographic and occu- decentralised fiscal policies under a rule- performance of which had to be evalu-
pational), and private capital flows, and based framework and does not provide ated and “if necessary be adapted in
on the other hand, policy based chan- for an (automatic) fiscal stabilisation the light of experience”’. The Commis-
26
nels including fiscal policies such as capacity ( ). Furthermore, while social sion’s Blueprint for a deep and genuine
automatic fiscal stabilisers, discretionary protection generally played a prominent EMU (2012), the Four Presidents’ report
taxes and public expenditure. And by con - role in compensating households’ income (2012) and the Commission Communica -
struction, they do not include monetary losses in the early phase of the crisis tion on strengthening the Social Dimen-
policy instruments (such as open market (2008–9), and thus helped stabilise the sion of the EMU (2013) stress that the
operations) or the possibility of adjusting economy, this capacity was eroded in the creation of an EMU-wide fiscal capacity
nominal exchange rates. second phase of the crisis (particularly in should be considered as a longer-term
2012 and 2013). This was due to a num - step to improve the stabilisation of EMU
The absence of national monetary pol- ber of factors, including high pre-existing economies, particularly in case of asym -
icy instruments and nominal exchange levels of sovereign debt and protracted metric shocks.
rates, combined with downward rigid- uncertainty about the EMU’s future, lead -
ity in prices and wages, requires addi- ing to cuts in public spending and/or tax It should also be underlined that, as
tional adjustments through quantities increases in many Member States ( ). stated in the Blueprint for a deep and
27
(including raising unemployment and genuine EMU (2012), such developments
decreasing real income) when a national The importance of a common fiscal relate to a medium- and long-term vision
economy is hit by an adverse asymmetric capacity at the monetary union level of the EMU and are thus complementary
shock. This is especially the case when had already been recognised in the to existing measures to improve policy
access to capital markets is limited, so early stages of European monetary pol- coordination, in particular implementa-
that the adjustment burden cannot be icy cooperation, such as in the Marjolin tion of the economic governance frame -
spread over time. Report in 1975, the MacDougall Report work, as well as developments relating to
in 1977 and the Delors report in 1989. the Banking Union, while they also imply
In addition, such a limited adjustment Enderlein and Rubio (2014) underlined a greater degree of sovereignty transfer
capacity can generate strong adverse that the Delors report considered that and hence should be accompanied by
socioeconomic consequences (such as ‘a well-functioning economic pillar was steps towards political integration.
distributional impacts, hysteresis effects, needed to limit the scope for diver-
and interactions with product markets, as gences’, requiring common regional and Available estimates of the level of risk
discussed below), which may generate structural policies and macroeconomic sharing (smoothing capacity against the
self-reinforcing adverse labour market policy coordination and that ‘more effec - impact of country specific shocks) overall
developments that increase the duration tive EC structural and regional poli cies in Europe suggest that it remains low,
and intensity of an economic downturn, were seen as indispensable to mitigate compared to Canada or the United States
with the risk of a permanent loss of the negative effects that economic and (see Allard et al. (2013) and Van Beers
potential output and employment. monetary integration was expected to et al. (2014)). It appears that the rela-
have on poorer regions’. In particular, it tive weakness of risk sharing in Europe
It is worth noting that since the intro- was feared that agglomeration effects and EMU does not derive from the credit
duction of the euro, there appear to be would ‘favour a shift in economic activ- markets, but is mainly due to lower risk
at least as many asymmetric shocks ity away from less developed regions, sharing in the capital market channels
as before (such as, for instance, meas- (which remains weak) and fiscal trans-
ured by the dispersion in growth rates; ( ) See Section 2.2 below. fer channels (which are comparatively
25
see, for instance, European Commission ( ) The EU budget contributes to stabilising inexistent, see chart). In this respect, the
26
(2008), Pisani (2012) and Allard et al. national budgets only in a marginal way, Banking Union should strengthen the
namely through slightly lower national fiscal
(2013)). While a number of factors affect contributions due to lower imports (tariffs) capital market and depreciation chan-
trends in business cycle synchronisation, and economic activity (VAT) and through nels, while the argument that its credibil -
reduced requirements for co-financing
increased trade integration can lead to of European Structural and Investment ity and efficiency would be strengthened
28
more synchronisation of the business Funds’ support (in the case of ‘programme by a fiscal backstop should be noted ( ).
countries’). The European Globalisation
cycle (see, for instance, Frankel and Rose, Adjustment Fund, outside the MFF, provides
1998), while there are other forces that small-scale financial assistance in case of
regional economic shocks.
28
reduce synchronisation, such as increas - ( ) See, for instance, EU Employment and Social ( ) See, for instance, IMF (2014), Article IV
Consultation with the Euro Area — Staff
27
ing economic specialisation linked to situation, Quarterly review, March 2014. report.
219
