Macroeconomic Policies: a Self-defeating Regime

This chapter begins by outlining the road to monetary union, and the steps along the way to monetary union with the formation of the European Monetary System and attempts to secure exchange rate stability between European currencies. Attention is given to the movements in the real exchange rates between EU countries and the effects which those had on economic performance. The road to the single currency was very much shaped by the Maastricht convergence criteria. The macroeconomic policies within the Eurozone (under the Stability and Growth Pact) are closely related to the convergence criteria with respect to the constraints on budget deficits and the ‘independence’ of the European Central Bank. The second half of the chapter provides a critique of those macroeconomic policies which have placed such drastic constraints on the growth dynamics of most European countries. The price which has been paid for the EMU has been particularly heavy in terms of unemployment and low levels of economic activity as evident from the statistics given in the previous chapter.