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Making EMU Work: Some Lessons from the 1990s

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  • Jörg Bibow

    (Univ of Hamburg & Jerome Levy Econ Inst)

Abstract

This paper investigates the lessons 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 of Europe's poor employment record. Instead, it is argued that macroeconomic demand management, particularly monetary policy, played the key role. 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 for 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 not unlikely 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 assumes its real role of generating domestic demand-led growth, thereby resolving Euroland's key structural problem: asymmetric monetary policy. Concerning 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

  • Jörg Bibow, 2001. "Making EMU Work: Some Lessons from the 1990s," Macroeconomics 0103008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0103008
    Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 41; figures: included
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0103/0103008.pdf
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    References listed on IDEAS

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    1. 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 901-921, September.
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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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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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