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Economic and Monetary Union

Selected e-articles

Abstract: This paper aims at quantifying the international impact of euro area stress shocks, which arise also from the incomplete nature of the European Economic and Monetary Union (EMU). We first disentangle such shocks from more general global risk aversion shocks by using sign, magnitude and narrative restrictions in a daily Structural Vector Autoregression (SVAR) model with financial variables. We then assess the impact of euro area stress shocks on macroeconomic variables in the euro area and the rest of the world via panel local projections. We find that these shocks have similar effects to supply-side shocks for other advanced economies, and demandside shocks for emerging economies. They also result in trade diversion across advanced and emerging economies and they are found to be noticeably more heteroscedastic than global shocks. As in previous literature, global risk shocks have an impact that can be interpreted as a demand-side shock, with a significant fall in economic activity and trade after risk-increasing shocks.

Abstract: This paper proposes a central fiscal capacity for the euro area that generates transfers in response to eurozone, country, and region-specific shocks. The main novelty of this fiscal capacity is that it allows a joint response to these three types of shocks within a single scheme. Based on NUTS3 regional data over the last two decades and regional fiscal multiplier estimates, our analysis shows that – with a limited risk of moral hazard – substantial stabilisation could have been achieved in response to the eurozone and regional shocks, while country-specific shocks were on average weaker and therefore needed less stabilisation.

Abstract: Previous literature on the channels of risk sharing in the EMU suggests that consumption smoothing through net savings is the dominant channel. This research aims to provide a deeper understanding and a more accurate interpretation of the working of the savings channel by exploring its international and public dimension. To do so, we quantify the shock absorption from external versus domestic mechanisms, and from the government and private sectors. We then measure consumption smoothing patterns across key time periods, episodes of financial stress, economic upturns and downturns, fiscal policy stances, and investigate possible heterogeneity between core and periphery countries.

Abstract: The Economic and Monetary Union has fundamentally changed how fiscal and monetary powers are exercised over democratic publics which raise the question of whether a normative vision of macroeconomic sovereignty is compatible with membership within the Eurozone. After conceptualising sovereignty in republican terms as the balance between four ‘power-countering strategies’, this article conducts a normative analysis of the evolution of Economic and Monetary Union governance. This exercise shows how – by neglecting one of the four republican strategies, namely to increase citizens’ democratic participation at the European Union level – successive institutional innovations as well as recent proposals fail to make the exercise of public powers compatible with citizens’ status equality. In contrast, the argument suggests that if citizens’ influence is channelled through a ‘system of dual partisanship’, in which national and European parliamentarians coordinate their activities, national and Economic and Monetary Union’ executives’ discretion can be democratically controlled.

Abstract: Euroization is considered as a solution for transition economies or as a step toward later integration into the Economic and Monetary Union (EMU). This article seeks to challenge this conventional trajectory by arguing that a country already participating in the EMU could opt for euroization. Instead of adopting a binary analysis of pros and cons, a moderate perspective is employed, tak-ing into account the specific institutional setup of Eurozone member countries. The aim of this article is to underscore the potential advantages of euroization, positioning it as a strategy that, though limited, can provide greater fiscal policy space.

Abstract: The COVID-19 crisis has put the European Union’s (EU) ability to respond to external challenges to test. It is not a new issue that has arisen due to the current crisis. The global economic crisis of 2008, and, in particular, the sovereign debt crisis of 2010, highlighted the need for institutional, policy and political reform to ensure the stability and long-term sustainability of the EU project. The EU’s asymmetric degrees of integration, in terms of Economic and Monetary Union (EMU) and non-EMU members, resulted in a diverse response to the crisis and, more importantly, mixed-effects from monetary and fiscal policies. This study aims to research the impact of monetary and fiscal policies between 2007 and 2015 on economic growth and employment. The findings show that loose monetary policies at the EU, EMU and non-EMU levels boosted economic growth and development. On the other hand, restrictive fiscal policy had favourably influenced GDP and employment by reducing inflationary pressures produced by expansive monetary policy. However, fiscal policy had a greaterimpact in the non-EMU countries, demonstrating that this policy can act as a stabilizing force in the face of anoverly expansive and common monetary policy. In order to respond effectively to the current and future crises, the EU government should overhaul the way monetary and fiscal policy is conducted and coordinated.

Abstract: We evaluate the stabilization properties of several rules and instruments to reduce government debt in a Currency Union, like the EMU. In a two-country New-Keynesian DSGE model, with a debt-elastic government bond spread and incomplete international financial markets, we study the effects of government debt deleveraging, under different scenarios for fiscal policy coordination. We find that greater stabilization is achieved when the two countries coordinate by stabilizing net exports. Moreover, we find that taxes are a better instrument for deleveraging compared to government transfers. Our policy prescriptions for the Euro Area are to reduce government debt less during recessions and liquidity traps, and to do so using distortionary taxes, while concentrating on reducing international demand imbalances.

Abstract: This paper tests for convergence of EMU inflation rates and industrial production by testing for the existence of fractional cointegration relations. The notion of fractional cointegration allows for long-term equilibria with a higher degree of persistence than allowed for in the standard cointegration framework. Over the full sample from 1999:Q1–2021:Q4, we find evidence of fractional cointegration in both inflation and industrial production among many country pairs. Our results suggest some evidence for “convergence clusters” among either core or periphery countries in the case of inflation. Similarly, we find stronger evidence of cointegration pairs among core countries for industrial production compared to periphery or mixed core–periphery groups. Testing for a break in the persistence structure, the results show evidence of a break in the persistence of both inflation and industrial production in a number of countries. Inflation persistence is substantially higher after the break, suggesting a higher potential for diverging processes during economic crises. On the contrary, for the case of industrial production, persistence is lower during the post-crisis period.

Abstract: We study the monetary–fiscal mix in the European Monetary Union. The medium and longrun effects of conventional and unconventional monetary policy are analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the cumulated response of the fiscal deficit is positive. Conversely, in response to an unconventional easing affecting the long end of the yield curve, the primary fiscal position barely moves. This is consistent with the long-run effect of unconventional monetary easing on the price index, which is about half that of conventional easing. The aggregate long-run cumulated surplus is mainly driven by Germany’s fiscal policy during the period in which unconventional monetary policy was adopted.

Abstract: The war in Ukraine draws renewed attention to the question of whether the international monetary and financial system is moving towards a more ‘multipolar’ character. The euro has been the second most important global currency since its creation, and well-placed to help diversify the global financial architecture. This article reviews the evolution of the euro’s international role along with the evolution of the institutional architecture to support it. Previous and ongoing reforms in the European Economic and Monetary Union (EMU) can support the common currency on the international stage.

Abstract: After the fall of the Bretton Woods system, the EU initiated an original path towards monetary integration which led to the establishment of the European monetary system (EMS) in the 1980s and the economic monetary union (EMU) in the 1990s. This path was an alternative to the floating exchange rate regime which many other countries decided to follow. Adopting a political economy approach, in this paper we reconstruct the main phases of this process, from the 1970s up until today, arguing that they cannot be explained only in terms of costs and benefits of alternative exchange rate configuration, but should consider political as well as economic factors—both domestic and international ones—and the interaction between European monetary and real integration. Ultimately, the predominance of political factors led to an underestimation of the economic difficulties generated by the coexistence of irrevocable exchange rates and full capital mobility. We suggest that new policy instruments and institutional changes are needed to make the common currency workable in the long run. The mandatory path should be towards a more deeply integrated Europe. Such integration is essential to enable the European monetary union to confront with future challenges.

Abstract: Europe embarked on the Economic and Monetary Union 25 years ago without sufficiently safeguarding some of the essential conditions that must be met to run a monetary union smoothly. The consequences of this omission came to light during the many and unprecedented crises that have shaped the European Central Bank. This article analyses and critically discusses the changing interpretation of the objective of price stability and the use of non-conventional policy instruments to realize this objective. Furthermore, the author analyses the problems with the monetary transmission within the eurozone and the framework for financial stability and supervision.

Abstract: This paper provides a comprehensive analysis of the interest rate pass‐through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of mone-tary policy spillovers. The results suggest that in the long run, more than the one‐third of all euro retail rates in euroized countries of central, eastern, and south‐easternEurope is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.

Resumen: La Unión Económica y Monetaria (UEM) se ha visto afectada por tres shocks de distinta naturaleza y, en consecuencia, ha ido transformando su gobernanza para hacerles frente, pero siempre lo ha hecho con retraso. Los tres shocks analizados son la crisis financiera de 2008, la pandemia del COVID-19 y las consecuencias de la invasión de Ucrania. Dada la distinta naturaleza de los mismos (financiera-real y demanda-oferta) y las carencias del marco de coordinación dentro de la UEM, la política económica ha ido transitando desde una posición de dominio monetario a otra de dominio fiscal, convirtiendo al Banco Central Europeo en el policy maker de último recurso, lo cual tiene claras limitaciones. Cada vez que el Banco Central Europeo ha intentado normalizar la situación, otro nuevo shock inesperado lo ha impedido. Al margen de los problemas de diseño en la gobernanza de la UEM, esta ha mostrado debilidades desde su creación, no solo por la falta de espíritu reformador de los Gobiernos nacionales que no han realizado las necesarias mejoras estructurales, sino también por los efectos negativos derivados de la falta de perfeccionamiento del mercado único. No obstante, se ha hecho evidente que una moneda única requiere un mercado común al completo. En conclusión, la UEM necesita un cambio significativo en su gobernanza para poder enfrentarse a los desafíos del futuro, incluyendo una mayor flexibilidad y adaptabilidad, que haga posible conjugar una visión estratégica a largo plazo y capacidad de toma de decisiones de manera más rápida y efectiva.

Résumé: Cet article évalue le degré d’hétérogénéité des pays au sein de la zone euro et son évolution au cours du temps en mesurant les écarts entre les trajectoires des taux de change d’équilibre des États membres. Ces trajectoires découlent de la minimisation des écarts entre les taux de change réels et leurs fondamentaux économiques, appelés mésalignements de change. À l’aide d’analyses par grappes et factorielles, nous identifions deux groupes de pays distincts dans la période pré-Union économique et monétaire européenne, la Grèce étant très atypique par rapport aux autres États membres à cette époque. En comparant les résultats à ceux obtenus sur des périodes plus récentes, nous constatons des disparités croissantes entre ces deux groupes de pays, ainsi qu’au sein des groupes eux-mêmes. Globalement, nos conclusions illustrent les déséquilibres macroéconomiques croissants au sein de la zone euro avant la crise de 2008 et la fragmentation économique qui a suivi entre ses pays membres.

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