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Making EMU Work: some lessons from the 1990s

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Author Info
Jörg Bibow
Abstract

This paper investigates what lessons may be learned from Europe's convergence process of the 1990s. The paper challenges the conventional focus on labour market institutions and 'structural rigidities' as the root cause behind Europe's poor employment record. Instead, it is argued that macro demand management played the key role, particularly monetary policy. Concentrating on Germany, the analysis shows that fiscal consolidation was accompanied by monetary tightness of an extraordinary degree and duration. This finding is of interest regarding the past as well as the future. For the Maastricht regime much resembles the one that produced the unsound policy mix of the 1990s: a constrained fiscal authority paired with an independent monetary authority free to impose its will on the overall outcome. The analysis thus highlights a key asymmetry in the Maastricht regime that is likely to continue to inflict a deflationary bias on the system. It is argued that this policy bias may be overcome only if the ECB deliberately assumed its real role of generating domestic demand-led growth, thereby resolving Euroland's key structural problem: asymmetric monetary policy. As regards the conventional structuralist theme, the analysis debunks the 'Dutch myth' of supply-led growth through structural reform. Depicting a popular fallacy of composition, we stress that the peculiar Dutch strategy of demand-led growth does not present itself as an option for Euroland.

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Article provided by Taylor and Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 15 (2001)
Issue (Month): 3 (July)
Pages: 233-259
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Handle: RePEc:taf:irapec:v:15:y:2001:i:3:p:233-259

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    Other versions:
  5. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  22. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  23. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July. [Downloadable!] (restricted)
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  26. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September. [Downloadable!] (restricted)
    Other versions:
  27. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 15-64, 04. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joerg Bibow, 2006. "Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement?," IMK Studies 01-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. [Downloadable!]
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