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Making EMU Work: Some lessons from the 1990s

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  • Jorg 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.

Suggested Citation

  • Jorg Bibow, 2001. "Making EMU Work: Some lessons from the 1990s," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 233-259.
  • Handle: RePEc:taf:irapec:v:15:y:2001:i:3:p:233-259
    DOI: 10.1080/02692170110051528
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    Cited by:

    1. Truger, Achim & Hein, Eckhard, 2004. "Macroeconomic co-ordination as an economic policy concept : opportunities and obstacles in the EMU," WSI Working Papers 125, The Institute of Economic and Social Research (WSI), Hans-Böckler-Foundation.
    2. Hein, Eckhard & Truger, Achim, 2002. "European Monetary Union: Nominal convergence, real divergence and slow growth? An investigation into the effects of changing macroeconomic policy institutions associated with monetary union," WSI Working Papers 107, The Institute of Economic and Social Research (WSI), Hans-Böckler-Foundation.
    3. Bartsch, Klaus & Hein, Eckhard & Truger, Achim, 2001. "Zur Interdependenz von Geld- und Lohnpolitik: Makroökonometrische Ex-post und Ex-ante Simulationen verschiedener Szenarien für die Bundesrepublik Deutschland
      [On the interdependence of monetary and
      ," MPRA Paper 18715, University Library of Munich, Germany.
    4. Hein, Eckhard & Truger, Achim, 2005. "European Monetary Union: nominal convergence, real divergence and slow growth?," Structural Change and Economic Dynamics, Elsevier, vol. 16(1), pages 7-33, March.
    5. Jorg Bibow, 2012. "At the Crossroads: The Euro and Its Central Bank Guardian (and Savior?)," Economics Working Paper Archive wp_738, Levy Economics Institute.
    6. Jörg Bibow, 2015. "The euro's savior? Assessing the ECB's crisis management performance and potential for crisis resolution," IMK Studies 42-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    7. Catherine Mathieu & Henri Sterdyniak, 2007. "The Stability and Growth Pact: Stability without growth?," Working Papers hal-00972878, HAL.
    8. Palazuelos, Enrique & Fernández, Rafael, 2009. "Demand, employment, and labour productivity in the European economies," Structural Change and Economic Dynamics, Elsevier, vol. 20(1), pages 1-15, March.
    9. 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.
    10. Jorg Bibow, 2015. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution," Economics Working Paper Archive wp_845, Levy Economics Institute.

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