The Outlook for EMU

Confounding forecasts of disruption and market turbulence, the transition to monetary union in Europe took place very smoothly. Some recent developments, however, are cause for concern, and important problems must still be resolved. The governments of most euro-zone countries do not subscribe to the ideological consensus on which the Maastricht Treaty was based--the belief that monetary policy should focus entirely on price stability, that fiscal policy can play no useful role in macroeconomic management, and that European unemployment is due mainly to structural rigidities. The leadership of the European Central Bank (ECB) does not appear to understand that the political legitimacy of the ECB depends on its deference to democratic accountability. The governors of the national central banks are unduly attentive to economic conditions in their own countries, rather than conditions in the whole euro zone, and have insisted on retaining responsibility for the conduct of monetary and exchange-rate policy, limiting the role of the ECB. Yet the monetary union is not likely to collapse. The costs of defection would be very high, even if it did not entail withdrawing from the European Union.