Eurozone Watch ? The case for political union: OCA revisited
リンク: Eurozone Watch ? The case for political union: OCA revisited.
by Daniela Schwarzer
As announced on this blog three weeks ago, Eurozone Watch intends to catch up with the arguments about a stronger political dimension of EMU which have been developed in the academic and think tank community for some time now. This is worthwhile doing as the analyses of the fragility of EMU and the arguments made for a stronger political dimension are not yet reflected in the current political discussing.
Our first pick is Paul de Grauwe’s recent article “What have we learnt on Monetary Integration since the Maastrich Treaty”, published by the Journal for Common Market Studies in its November 2006 special issue on EMU.
Paul de Grauwe observes that in contrast to the United States, there is no coercive power in the EMU that can keep a Member State within the Union. Hence, to continue membership, it must be in the state’s interest to do so. The question then is: What kind of governance can ensure that countries are willing to stay? This question is especially salient when problems of adjustments to shocks get centre stage while the reasons why member states once joined the monetary union (such as to get rid of the exchange rate) are increasingly forgotten. His theoretical starting point being two alternative readings of Optimum-Currency-Area (OCA) Theory, de Grauwe seeks to find out how a political union would feed back into the OCA-analysis and vice-a-versa. He does not define political union in detail, but equates it with a centralised budgetary authority.
De Grauwe argues that a stronger political union could shift the euro closer to being an optimum currency area (and hence could reduce its risk to break apart). First, fiscal transfers would provide some insurance against asymmetric shocks. He sees a central budget as a redistributive but also as a device able to stabilise the business cycle. Second, the risk of asymmetric shocks of political origin is reduced (such as the French 35-hours shock). Furthermore, more political integration would create a sense of community of purpose.
He defines several conditions for the suggested insurance mechanism to work.
- Transfers should not reduce the incentives of the receiving regions to adjust to shocks, otherwise temporary transfers become chronic.
- Hence, the European insurance scheme should remain relatively small compared to the national schemes. In any case, there is unlikely to be large political or public support for a very large EU budget.
- Conditionality has to be attached in order to reduce moral hazard problems.
In addition to a transfer mechanism, de Grauwe requests stronger coordination between those areas of national economic policies that can generate shocks.
As de Grauwe says, these suggestions are not in line with the Brussels-Frankfurt-consensus enshrined in the Maastricht Treaty. The Maastricht consensus relies entirely on increased flexibility through structural reforms, plus on the member states' capacity to deal with business cycle movements within the framework of the Stability and Growth Pact. In the Maastricht logic, the ECB stabilises the economy by its monetary policy focussed entierly on monetary stability. There is hence no need for a system-wide cyclical stabilisation policy. De Grauwe, in contrast, underlines the problems encountered during the 2001 economic slowdown when the ECB could not deliver a satisfying macroeconomic management.
Without explaining how it could be installed, de Grauwe calls for a central European government with the power to tax and spend in order to complement the macro-economic management of the ECB and to back its monetary policy. Further, a limited and conditional insurance mechanism should be installed, because “if each time a country of the union gets into trouble because of asymmetric developments, it is told by other member states that it is entirely its own fault”, this is “a union [that] will not last”.
We at Eurozone Watch share most of his analysis about the conditions for long-term macro-economic and political stability in the EMU. In fact, from a less theoretical starting point, but observing persisten regional cyclical divergences in the EMU from 2001 to 2005, we have suggested to install a trans-border cyclical stabilisation mechanisms in June 2005. In an SWP-Comment, Sebastian and I suggest the creation of a European unemployment insurance and the introduction of the Eurozone-wide corporate tax. Read our ideas here and tell us what you think of them!
[…] Eurozone watch runs over the benefits of closer European political integration, while Kosmopolit and Crooked Timber have the lowdown on the political breakup of Belgium earlier in the week. December 16th, 2006 at 12:07 pm […]