Wallace, Pollack, Young

CHAPTER 7
Economic and Monetary

Union
An Experiment in New Modes of EU
Policy-Making
Dermot Hodson
Introduction
158
Historical development and
rationale
159
Monetary policy-making under EMU
165
The ECB as an economic actor
166
, :rhe ECB as a political actor 168
r ~ , ~ m m r pojicy-making under EMU 170
EMU and polie)' coordinalion
The emergence of the Eurogroup
The euro area as a global actor
EMU and the global finanCial crisis
Conclusions
FURTHER READING
171
174
175
176
1 5 8 D e r m o t H o d s o n
I n t r o d u c t i o n
1
T h e m a c r o e c o n o m y i s a p r o v i n c e o f p u b l i c p o l i c ) ' t h a t h a s t r a d i t i o n a l l y b e e n c l o s e l y
g u a r d e d b ) ' n a t i o n a l p o l i t i c i a n s , c i v i l s e r v a n t s , a n d c e n t r a l - b a n k o f f i c i a l s . I t t y p i c a l l y
e n t a i l s t h e s e t t i n g o f s h o r t - t e r m i n t e r e s t r a t e s ( m o n e t a r y p o l i c y ) a n d d e c i s i o n s r e -
l a t e d t a g o v e r n m e n t e x p e n d i t u r e a n d t a x a t i o n ( f i s c a l p o l i c y ) a n d c a n i n c l u d e m e a s -
u r e s d e s i g n e d t a i n f l u e n c e t h e e x t e r n a l v a l u e o f t h e c u r r e n c y ( e x c h a n g e - r a t e p o l i c y ) .
M a c r o e c o n o m i c p o l i c i e s a n d s t r u c t u r a l r e f o r m s a r e c l o s e l y i n t e r t w i n e d , w i t h t h e
l a t t e r i n c l u d i n g r e g u l a t a r y c h a n g e s a i m e d a t i m p r o v i n g t h e f u n c t i o n i n g o f p r o d u c t ;
l a b o u r , a n d f i n a n c i a l m a r k e t s .
E M U e n t a i l s a r a d i c a l s h i f t i n m a c r o e c o n o m i c p o l i c y - m a k i n g i n t h e E U . A s o f
N o v e m b e r 2 0 0 9 , 1 6 e u r o - a r e a c o u n t r i e s - A u s t r i a , B e l g i u m , C y p r u s , F i n l a n d ,
F r a n c e , G r e e c e , G e r m a n y , I r e l a n d , h a l y , L u x e m b o u r g , M a l t a , T h e N e i t I e r l a n d s , P o r -
t u g a l , S l o v a k i a , S l o v e n i a , a n d S p a i n - h a v e e x c h a n g e d t h e i r n a t i o n a l c u r r e n c i e s f o r
t h e e u r o a n d d e l e g a t e d r e s p o n s i b i l i t y f o r m o n e t a r y p o l i c y t a t h e E C B . M e m b e r s t a t e s
h a v e r e t a i n e d c o n t r o l o v e r t h e o t h e r a s p e c t s o f m a c r o e c o n o m i c p o l i c y , a l t h o u g h
t h e y h a v e a g r e e d t a c o o r d i n a t e t h e s e p o l i c i e s w i t h i n t h e C o u n c i l o f M i n i s t e r s f o r
E c o n o m i c a n d F i n a n c i a l A f f a i r s ( E c o f i n ) . T a t h i s e n d , m e m b e r s t a t e s h a v e i m p o s e d
l i m i t s a n g o v e r n m e n t b o r r o w i n g u n d e r t h e S t a b i l i t y a n d G r o w t h P a c t ( S G P ) a n d
a g r e e d t a c o o r d i n a t e s t r u c t u r a l r e f o r m s t h r o u g h t h e B r o a d E c o n o m i c P o l i c y G u i d e -
l i n e s ( B E P G s ) .
E M U h a s a t h r e e f o l d s i g n i f i c a n c e f o r s t u d e n t s o f E U p o l i c y - m a k i n g . F i r s t l y ,
t h e s i n g l e c u r r e n c y i s a m o n g t h e m o s t t a n g i b l e s y m b o l s o f E u r o p e a n i n t e g r a -
t i o n f o r t h e 3 2 8 m i l l i o n p e o p l e w h o I i v e i n t h e e u r o a r e a . S e c o n d l y , w i t h t h e
e u r o n o w a l e a d i n g i n t e r n a t i o n a l c u r r e n c y , E M U i s c e n t r a l t a t h e E U ' s a m b i -
t i o n s t a b e c o m e a l e a d i n g p l a y e r a n t h e w o r l d s t a g e . T h i r d l y , a n d c r i t i c a l l y f o r
t h e t h e m e s o f t h i s v o l u m e , E M U i s a h i g h - s t a k e s e x p e r i m e n t i n n e w m o d e s
o f E U p o l i c y - m a k i n g . A s d i s c u s s e d i n C h a p t e r 4 , t h e t r a d i t i o n a l C o m m u n i t y
m e t h o d i n v o l v e s t h e d e l e g a t i o n o f k e y r e s p o n s i b i l i t i e s t a t h e C o m m i s s i o n .
U n d e r E M U , m o n e t a r y p o l i c y h a s b e e n d e l e g a t e d t a a n e w k i n d o f s u p r a n a t i o n a l
i n s t i t u t i o n , t h e E C B , w h i l e e c o n o m i c p o l i c y - m a k i n g , w i t h i t s r e l i a n c e a n l e g a l I y
n o n - b i n d i n g m e a s u r e s , i s a p i o n e e r i n g a t t e m p t a t p o l i e y c o o r d i n a t i o n a m o n g
n a t i o n a l g o v e r n m e n t s .
T h i s c h a p t e r e x p l o r e s t h e o r i g i n s a n d e v o l u t i o n o f E M U a s t h e e u r o e n t e r s i t s
s e c o n d d e c a d e . T h e f i r s t s e c t i o n p u t s E M U i n h i s t o r i c a l c o n t e x t a n d l o o k s a t t h e
e c o n o m i c a n d p o l i t i c a l r a t i o n a l e f o r t h e c r e a t i o n o f t h e e u r o . T h e s e c o n d a n d t h i r d
s e c t i o n s l o o k a t m o n e t a r y a n d e c o n o m i c p o l i c y - m a k i n g r e s p e c t i v e l y . T h e f o u r t h
s e c t i o n d i s c u s s e s t h e e u r o f r o m a g l o b a l s t a n d p o i n t a n d t h e f i f t h s e c t i o n o f f e r s a
e u r o - a r e a p e r s p e c t i v e o n t h e c r i s i s i n g l o b a l f i n a n c i a l m a r k e t s t h a t e m e r g e d i n
2 0 0 7 - 8 .
E c o n o m i c a n d M o n e t a r y U n i o n 1 5 9
H i s t o r i c a l d e v e l o p m e n t a n d r a t i o n a l e
T h e 1 9 5 7 T r e a t y o f R o m e ( E E C ) c o n t a i n e d f e w r e f e r e n c e s t o m a c r o e c o n o m i c p o l i c y
a n d n o r e f e r e n c e t a E M U . I t s m o s t s i g n i f i c a n t m a c r o e c o n o m i c p r o v i s i o n s ' w e r e
A r t i c l e 1 0 5 , w h i c h c a l l e d o n m e m b e r s t a t e s t a c o o r d i n a t e t h e i r e c o n o m i c p o l i c i e s
w i t h a v i e w t o a c h i e v i n g e q u i l i b r i u m i n t h e i r b a l a n c e o f p a y m e n t s , a n d A r t i c l e 1 0 8 ,
w h i c h a l l o w e d t h e C o u n c i l t o p r o v i d e m u t u a l a s s i s t a n c e i n t h e e v e n t o f a b a l a n c e - o f -
p a y m e n t s c r i s i s . O n e r e a s o n w h y t h e I r e a t y d i d n o t g o f u r t h e r i n t h e m a c r o e c o n o m i c
d o m a i n w a s t h a t t h e K e y n e s i a n c o n s e n s u s t h a t h e l d s w a y a m o n g e c o n o m i s t s a t t h e
t i m e s t r e s s e d t h e n e e d f o r n a t i o n a l c o n t r o l o f m a c r o e c o n o m i c p o l i c y i n s t r u m e n t s .
S p e c i f i c a l l y , g o v e r n m e n t s w e r e e x p e c t e d t o t r a d e o f f h i g h e r i n f l a t i o n f o r l o w e r
u n e m p l o y m e n t a n d , i n t h e e v e n t o f a n e c o n o m i c d o w n t u r n , t a s t i m u l a t e a g g r e g a t e
d e m a n d t h r o u g h a c o m b i n a t i o n o f t a x c u t s , e x p e n d i t u r e i n c r e a s e s , a n d i n t e r e s t - r a t e
r e d u c t i o n s . A l s o , a t t h e m o m e n t o f t h e E E C ' s c r e a t i o n , m e m b e r s t a t e s ' c u r r e n c i e s
w e r e n o t y e t c o n v e n i b l e , m e a n i n g t h a t t h e r e w e r e l e g a l l i m i t s a n t h e e x c h a n g e
o f o n e c u r r e n c y f o r a n o t h e r ( E i c h e n g r e e n 2 0 0 7 : 7 3 ) . A n o t h e r r e l e v a n t f a c t o r w a s
t h a t m e m b e r s t a t e s h a d I i t t l e i n c e n t i v e a t t h i s t i m e t a c h a l l e n g e t h e B r e t t o n W o o d s
A g r e e m e n t o f 1 9 4 4 , w h i c h s e c u r e d e x c h a n g e - r a t e s t a b i l i t y a m o n g i n d u s t r i a l c o u n -
t r i e s b y I i n k i n g t h e U S d o l I a r t a g o l d a n d I i n k i n g n a t i o n a l c u r r e n c i e s t o t h e d o l l a r
( s e e M a e s 2 0 0 4 ) .
A t a s u m m i t i n T h e H a g u e i n D e c e m b e r 1 9 6 9 , E E C l e a d e r s a g r e e d t a w o r k o u t
a p l a n f o r E M U . T h e p r i n c i p a l r e a s o n f o r t h i s c h a n g e l a y n o t i n s h i f t i n g m a c r o -
e c o n o m i c p a r a d i g m s b u t i n t h e d e e l i n e o f t h e B r e t t o n W o o d s s y s t e m , w h i c h h a d
c o m e u n d e r i n c r e a s i n g s t r a i n a s t h e U S A s t r u g g l e d t a m a i n t a i n t h e d o l l a r ' s l i n k w i t h
g o l d a m i d t h e s p i r a l l i n g c o s t s o f t h e V i e t n a m W a r . T h e r e w e r e a l s o c o n c e r n s a t t h e
t i m e t h a t a s w i t c h f r o m f i x e d t a f l o a t i n g e x c h a n g e r a t e s w o u l d d i s r u p t t r a d e r e l a t i o n s
w i t h i n t h e c o m m o n m a r k e t a n d a d d t a t h e c o s t o f f i n a n c i n g t h e c o m m o n a g r i c u l -
t u r a l p o l i c y ( C o m m i s s i o n 1 9 6 9 ) .
T h e W e r n e r P l a n f o r E M U , w h i c h w a s p r e s e n t e d i n O c t o b e r 1 9 7 0 , f e l l a t t h e f i r s t
h u r d l e . B r e t t o n W o o d s c o l l a p s e d i n A u g u s t 1 9 7 1 a n d w a s r e p l a c e d f o u r m o n t h s
l a t e r b y t h e S m i t h s o n i a n A g r e e m e n t , w h i c h p e r m i t t e d w i d e r b a n d s o f f l u c t u a t i o n
v i s - a - v i s t h e U S d o l l a T . I n M a r c h 1 9 7 2 , t h e S i x ( j o i n e d b y t h e a c c e d i n g D e n m a r k ,
I r e l a n d , a n d t h e U K ) e s t a b l i s h e d t h e ' s n a k e i n t h e t u n n e l ' , a n e x c h a n g e - r a t e s y s t e m
i n w h i c h m e m b e r s t a t e s a g r e e d t a n a r r o w e r b a n d s o f f l u c t u a t i o n f o r E E C c u r r e n c i e s
( ' t h e s n a k e ' ) w i t h i n t h e w i d e r b a n d s o f t h e S m i t h s o n i a n A g r e e m e n t e t h e t u n n e l ' ) .
A f t e r o i i p r i c e s s u r g e d i n 1 9 7 3 , E E C m e m b e r s t a t e s w e r e d i v i d e d a n t h e q u e s t i o n
o f w h e t h e r t o s a c r i f i c e t h e K e y n e s i a n p r i o r i t i e s o f g r o w t h a n d e m p l o y m e n t f o r
l o w i n f l a t i o n . T h i s l a c k o f c o n s e n s u s l e d t a m a c r o e c o n o m i c d i v e r g e n c e s w i t h i n t h e
E E C , m o s t n o t a b l y b e t w e e n F r a n c e a n d G e r m a n y , a n d d e a l t a f a t a l b l o w t a t h e E E C ' s
f l e d g l i n g e x c h a n g e - r a t e r e g i m e .
I
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160 Dermot Hodson
TABLE 7.1 Chronology ofEMU
July 1944
Mar 1957
Dec 1969
Oct 1970
Mar 1971
Aug 1971
Dec 1971
Mar 1972
Feb 1973
Mar 1979
June 1988
Apr 1989
July 1990
Feb 1992
Sept 1992
Aug 1993
Jan 1994
June 1997
Dec 1997
May 1998
Jan1999
Mar 2000
Jan 2001
Jan 2002
Mar 2005
Jan 2007
Jan 2008
dan 2009
Bretton Woods Agreement signed
Treaty of Rome signed
Hague summit calls for a plan for EMU
Werner Group adopts its final re port
Member states agree to three-stage plan for EMU
Collapse of the Bretton Woods System
Smithsonian Agreement signed
Launch of the snake in the tunnel
Collapse of the Smithsonian Agreement
Launch of the EMS
European Couneil in Hanover establishes the Delors Committee
Delors Committee adopts its final report
Stage 1 of EMU begins
Treaty on European Union signed at Maastricht
Italy and the UK exit the ERM
Reform of the ERM
Stage 2 of EMU begins; European Monetary Institute established
European Couneil in Amsterdam adopts the SGP
European Couneil in Luxembourg creates the Eurogroup
Council of Ministers deeides that 11 member states have met the
convergence criteria; ECB established
Stage 3 of EMU begins and the euro area is created
European Council in Lisbon adopts the Llsbon Strategy
Greece joins the euro area
Changeover to euro notes and coins
European Council in Brussels revises SGP and Lisbon Strategy
Slovenia joins the euro area
Cyprus and Malta join the euro area
Slovakia joins the euro area as the euro marks its 1Dth anniversary
Economic and Monetary Union 161
In 1979, EEC member states ma de a fresh attempt to coordinate their macro-
economic policies with the establishment of the European Monetary System (EMS).
_The centrepiece of the EMS was the exchange-rate-mechanism (ERM), a regime
designed to minimize fluctuations in bilateral exchange rates. A weighted basket of
EEC currencies, the European currency unit (ecu), was used as the denominator for
this system. The EMS fared better than the snake in the tunnel , helping to promote
exchange-ril.te stabilityand to reduce inflation, especially in the second half of the
1980s when national governments resorted less frequently to the practice of devalu-
ing their currencies.
McNamara (1998) links the creation and comparative success of EMS to a
growing commitment to monetarism among EEC member states [rom the mid-1970s
onwards. Monetarism challenged. Keynesianism's approach to macroeconomic pol-
icy, rejecting the existence of a long-term trade-offbetween growth and employment
and calling on policy-makers to prioritize the pursuit of low inflation by restricting
money-supply growth. Although monetarism typically supports flexible exchange
rates, EEC member states, McNamara argues, viewed the ERM as a commitment
device for achieving monetarism's primary objective of price stability A case in point
was France, where President Franc;:ois Mitterrand used the ERM to reinforce his
efforts to reduce inflation and restore macro economic credibility after abandoning
his unsuccessful experiment in Keynesianism in 1983.
The European Council in Hanover in June 1988 asked the Commission Presi-
dent, Jacques Delors, to draw up a fresh plan for EMU. On the basis of this blue-
print, EU leaders adopted a three-stage transition to EMU that was enshrined
in the Treaty on European Union (TEU), signed at Maastricht in 1992. Stage 1
(1990-4) included the removal of the remaining barriers to the free movement
of capital and the granting of political independence to central banks. Stage 2
(1994-8) required member states to demonstrate their commitment to macroeco-
nomic discipline by meeting convergence criteria (see Table 7.2) and established
the European Monetary Institute (EMI) to oversee the transition to EMU. Stage 3
(1999 onwards) included the irrevocable fix ing of exchange rates and the creation
of the ECB. In keeping with the new classical economics, the intellectual succes-
sor to monetarism in the 19805, the Treaty tackled concerns about the ability of
short-sighted governments to make the right long-term choices for the economy
It did this, firstly, by guaranteeing the ECB's independence from political control
(Art. 108 TEC) and, secondly, through the excessive deficit procedure, which pro-
hibits member states from running budget deficits in excess of 3 per cent of gross
domestic product (GDP) (Art. 104 TEC).
European integration scholars are divided as to the rationale for resuscitating plans
for EMU at this time (see Sadeh and Verdun 2009). Neo-functionalists emphasize the
importance of spill-over from prior stages of economic integration. Padoa-Schioppa
(2000), for example, argued that member states' commitment to fixed exchange
rates under the EMS and the free movement of capital under the single European
1 6 2 D e r m o t H o d s o n .
T A B L E 7 . 2 S u m m a r v o f t h e c o n v e r g e n c e c r i t e r i a ( A r t . 1 2 1 T E C )
W h a t i s m e a s u r e d ? H o w i s i t m e a s u r e d ?
C o n v e r g e n c e c r i t e r i a
P r i c e s t a b i l i t y
H a r m o n i z e d i n d e x o f
N o t m o r e t h a n 1 . 5 p e r c e n t a g e
c o n s u m e r p r i c e s ( H I C P )
p o i n t s a b o v e t h e t h r e e b e s t -
p e r f o r m i n g m e m b e r s t a t e s
S o u n d p u b l i c f i n a n c e s G o v e r n m e n t d e f i c i t
R e f e r e n c e v a l u e : n o t m o r e
a s % o f G D P t h a n 3 %
S u s t a i n a b l e p u b l i c G o v e r n m e n t d e b t a s %
R e f e r e n c e v a l u e : n o t m o r e
f i n a n c e s
o f G D P
t h a n 6 0 % ; i t a b o v e t h i s
r e f e r e n c e v a l u e . g o v e r n m e n t
d e b t s h o u l d h a v e s u f f i c i e n t l y
d i m i n i s h e d a n d m u s t b e
a p p r o a c h i n g 6 0 % a t a
s a t i s f a c t o r y p a c e
D u r a b l e
L o n g - t e r m i n t e r e s t r a t e s
N o t m o r e t h a n 2 p e r c e n t a g e
c o n v e r g e n c e
p o i n t s a b o v e t h e t h r e e b e s t -
p e r f o r m i n g m e m b e r s t a t e s i n
t e r m s o f p r i c e s t a b i l i t y
E x c h a n g e - r a t e
D e v i a t i o n f r o m a c e n t r a l r a t e
P a r t i c i p a t i o n i n E R M I I f o r t w o
s t a b i l i t y
y e a r s w i t h o u t s e v e r e t e n s i o n s
S o u r c e : C o m m i s s i o n ( 2 0 0 B d : B l
m a r k e t p r o g r a m m e ( s e e C h a p t e r 5 ) r e n d e r e d n a t i o n a l c o n t r o l o v e r m o n e t a r y p o l i c y
u n w o r k a b l e a n d f o r c e d t h e m t a c h o o s e b e t w e e n e i t h e r f l e x i b l e e x c h a n g e r a t e s a r f u l l
m o n e t a r y u n i o n . I n t e r g o v e r n m e n t a l i s t s , i n c o n t r a s t , e x p l a i n E M U a s t h e o u t c o m e
o f i n t e r s t a t e b a r g a i n i n g . I n a v a r i a t i o n a n t h i s t h e m e , M o r a v c s i k ( 1 9 9 8 ) v i e w s E M U
a s a n a t t e m p t b y n a t i o n a l g o v e m m e n t s , m o t i v a t e d p r i m a r i l y b y e c o n o m i c i n t e r e s t s ,
t a l o c k i n t h e b e n e f i t s o f m a c r o e c o n o m i c s t a b i l i t y a t t h e E U l e v e l . T h e b e n e f i t s o f
t h i s e n t e r p r i s e , h e a r g u e s , w e r e m o d e s t f o r G e r n 1 a n y , i n p a r t b e c a u s e o f t h e
p r i v i l e g e d p o s i t i o n o f t h e D e u t s c h m a r k i n t h e E M S . F o r M o r a v c s i k , t h i s e x p l a i n s w h y
M a a s t r i c h t e n s h r i n e d m a c r o e c o n o m i c p r i n c i p l e s t h a t e n j o y e d a h i g h d e g r e e o f s u p p o r t
a m o n g G e r m a n p o l i c y - m a k e r s , e s p e c i a l l y t h e o v e r r i d i n g i m p o r t a n c e a t t a c h e d t a p r i c e
s t a b i l i t ) ' .
E c o n o m i s t s h a v e g e n e r a l l y b e e n m o r e c i r c u m s p e c t t h a n p o l i t i c a l s c i e n t i s t s a b o u t
t h e e x a n l e e c o n o m i c r a t i o n a l e f o r E M U . F o l l o w i n g M u n d e l l ( 1 9 6 1 ) , t h e p r e v a i l -
i n g v i e w i n t h e 1 9 8 0 s a n d 1 9 9 0 s w a s t h a t E u r o p e a n c o u n t r i e s w o u l d s t r u g g k t a
f o r m a n o p t i m u m c u r r e n c y a r e a ( O C A ) b e c a u s e o f t h e p r e v a l e n c e o f a s y m m e t -
r i c s h o c k s ( e c o n o m i c d i s t u r b a n c e s t h a t a f f e c t d i f f e r e n t m e m b e r s t a t e s i n d i f f e r e n t
w a y s ) a n d t h e p e r c e i v e d l a c k o f f l e x i b i l i t y i n p r o d u c t a n d l a b o u r m a r k e t s . O f c o u r s e ,
' 1
I
t h e l o g i c o f O C A t h e o r y i s n o t u n d i s p u t e d . M u n d e l l h i m s e l f w a r n e d t h a t f l o a t i n g
e x c h a n g e r a t e s c o u l d b e a c a u s e o f , r a l h e r t h a n a c u r e f o r , m a c r o e c o n o m i c i n s t a b i l -
i t y w h e n c a p i t a l f l o w s f r e e l y b e t w e e n c o u n t r i e s ( D e G r a u w e 2 0 0 6 ) . F u n h e r m o r e ,
t h e m a c r o e c o n o m i c c o s t s o f g i v i n g u p n a t i o n a l e x c h a n g e r a t e s m u s t b e w e i g h e d
a g a i n s t l h e m i c r o e c o n o m i c b e n e f i t s o f m o n e t a r y u n i o n , w h i c h i n c l u d e t h e e l i m i n a -
t i o n o f e x c h a n g e - r a t e u n c e n a i n t y , t h e t r a n s a c t i o n c o s t s a v i n g s o f d o i n g b u s i n e s s i n
o n e c u r r e n c y , a n d t h e c o m p e t i t i v e g a i n s f r o m i n c r e a s e d p r i c e t r a n s p a r e n c y b e t w e e n
c o u n t r i e s ( D e G r a u w e 2 0 0 7 ) .
I n t h e e a r l y 1 9 9 0 5 , p r e p a r a t i o n s f o r E M U h i t a s t u m b l i n g b l o c k w h e n f a l l i n g e c o -
n o m i c g r o w t h a n d r i s i n g u n e m p l o y m e n t g e n e r a t e d s i g n i f i c a n t s t r a i n s w i t h i n t h e
E M S . T h i s p r o b l e m w a s c o m p o u n d e d b y t h e e c o n o m i c c o n s e q u e n c e s o f G e r m a n
u n i f i c a t i o n , w h i c h c r e a t e d s u s t a i n e d i n f l a t i o n a r y p r e s s u r e s a n d f o r c e d t h e B u n d e s -
b a n k t a i n c r e a s e i n t e r e s t r a t e s . O t h e r E E C m e m b e r s r e s p o n d e d b y r a i s i n g i n t e r e s t
r a t e s , a m o v e t h a t h e l p e d t o s t a b i l i z e t h e i r c u r r e n c i e s a g a i n s t t h e D e u t s c h m a r k b u t
w o r s e n e d t h e e f f e c t s o f t h e r e c e s s i o n . W h e n D a n i s h v o t e r s r e j e c t e d t h e T E U i n J u n e
1 9 9 2 , m e m b e r s t a t e s ' c o m m i t m e n t t o E M U a n d , b y i m p l i c a t i o n , t h e E R M w a s c a s t
i n t o d o u b t . F o l l o w i n g i n t e n s e c u n e n c y s p e c u l a t i o n , I t a l y a n d t h e U K w e r e f o r c e d t a
s u s p e n d t h e i r m e m b e r s h i p o f t h e E R M i n S e p t e m b e r 1 9 9 2 .
T h e E E C s o o n w e a t h e r e d t h i s e c o n o m i c a n d p o l i t i c a l s t o r m . D a n i s h v o t e r s , a s -
s u a g e d b y t h e g u a r a n t e e o f a n o p t - o u t f r o m S t a g e 3 o f E M U , v o t e d f o r t h e T E U i n
a s e c o n d r e f e r e n d u m i n J u n e 1 9 9 3 . T h e E R M w a s e f f e c t i v e l y d i s m a n t l e d i n A u g u s t
1 9 9 3 , w h e n t h e r e m a i n i n g m e m b e r s t a t e s a d o p t e d e x t r a - l a r g e m a r g i n s o f f l u c t u a t i o n
b e t w e e n t h e i r c u r r e n c i e s . A s u s t a i n e d e c o n o m i c r e c o v e r y d u r i n g t h e r e m a i n d e r o f
t h e d e c a d e e n a b l e d m e m b e r s t a t e s t a m a k e s i g n i f i c a n t p r o g r e s s t o w a r d s m e e t i n g t h e
c o n v e r g e n c e c r i t e r i a . I n M a y 1 9 9 8 , t h e C o u n c i ! o f M i n i s t e r s , m e e t i n g i n t h e c o m p o -
s i t i o n o f h e a d s o f s t a t e o r g o v e r n m e n t , a g r e e d t h a t e l e v e n m e m b e r s t a t e s - A u s t r i a ,
B e l g i u m , F i n l a n d , F r a n c e , G e r m a n y , I r e l a n d , l t a l y , L u x e m b o u r g , T h e N e t h e r l a n d s ,
P o n u g a l , a n d S p a i n - f u l f i l l e d t h e c r i t e r i a a n d c o u l d p r o c e e d t a S t a g e 3 o f E M U . T h e
i n c l u s i o n o f B e l g i u m a n d I t a l y o n t h i s l i s t w a s p o l i t i c a l l ) ' c o n t r o v e r s i a l s i n c e p u b l i c
d e b t i n t h e s e c o u n t r i e s , t h o u g h i t w a s d i m i n i s h i n g i n l i n e w i t h t h e t r e a t ) ' r e q u i r e -
m e n t s , e x c e e d e d 1 0 0 p e r c e n t o f G D P
T h e e u r o w a s d u l y l a u n c h e d o n 1 J a n u a r y 1 9 9 9 a l o n g w i t h t h e E R M I I , a n
e x c h a n g e - r a t e r e g i m e i n w h i c h m e m b e r s t a t e s a s p i r i n g t o a d o p t t h e s i n g l e c u r r e n c y
h a v e a g r e e d t o m i n i m i z e f l u c t u a t i o n s b e t w e e n t h e i r c u r r e n c i e s a n d t h e e u r o . G r e e c e
j o i n e d t h e e u r o a r e a i n J a n u a r y 2 0 0 1 , t w e l v e m o n t h s b e f o r e t h e c h a n g e o v e r t o e u r o
n o t e s a n d c o i n s . I n J a n u a r y 2 0 0 7 , S l o v e n i a b e c a m e t h e f i r s t o f t h e E U ' s ' n e w ' m e m b e r
s t a t e s 1 0 j o i n t h e e u r o , f o l l o w e d b y C y p r u s a n d M a l t a i n J a n u a r y 2 0 0 8 a n d S l o v a k i a
i n J a n u a r y 2 0 0 9 .
T h e E u r o p e a n C o u n c i ! t o o k a n u m b e r o f s t e p s a r o u n d t h e t i m e o f t h e e u r o ' s
l a u n c h t o s t r e n g t h e n e c o n o m i c p o l i c y c o o r d i n a t i o n , i n c l u d i n g t h e c r e a t i o n o f a n
i n f o r m a l b o d y o f e u r o - a r e a f i n a n c e m i n i s t e r s , t h e E u r o g r o u p , i n D e c e m b e r 1 9 9 7 a n d
t h e u n v e i l i n g o f a n a m b i t i o u s p r o g r a m m e o f p r o d u c t - , l a b o u r - , a n d f i n a n c i a l - m a r k e t
r e f o r m s , t h e s o - c a l l e d L i s b o n S t r a t e g y , i n M a r c h 2 0 0 0 . P e r h a p s t h e m o s t e c o n o m i c a l l y
164 Dermot Hodson
and politically controversial initiative of this period was the signature of the SGP in
June 1997. politically, this agreement signalled the EUs determination to impose
limi ts on government borrowing by speeding up and clarifying the implementation
of the excessive deficit procedure. Economically, the SGP provided a medium-term
focus for fiscal policy under EMU. In this respect, its aim was ta allow member states
to use fiscal stabilizers in the event of an economic dowmurn without breaching the
excessive-deficit ceiling by first achieving budgetary positions of close to balance or
in surplus (Artis and Buti 2000). In this respect, the SGP's attempt to reconcile the
need for short-term fiscal stabilization with the long-term sustainability of public
finances reflected one of the key tenets of New Keynesianism, an economic
paradigm that has dominated since the 1990s (see Iversen and Soskice 2006) .
Only the UK and Denmark have formal opt-outs from Stage 3 of EMU, secured
in the negotiations over the TEU. These opt-outs are likely to remain in place
unti! euro membership has been approved bypopular referendums. In the UK, the
Labour Pany, mindful of lukewarm public support for EMU, is committed ta euro
membership 'in principle' but not umil the economic conditions are right, while
the Conservatives, scarred by their experience in government . dur ing the ERM
crisis of 1992, remain strongly opposed ta the single currency. In spite of such dif-
ferences, the political salience of EMU has been low since a study by HM Treasury
in June 2003 concluded that the economic case for adopting the euro had not yet
been met (HM Treasury 2003) . Danish voters roundly rejected euro membership
TABLE 7.'3 State of playfor non-euro area members
Participating in ERM II
Bulgaria No
Czech Republic No
Denmark Yes
Estonia
Yes
Latvia Yes
Lithuania Yes
Hungary No
Pol and No
Romania No
Sweden No
UK No
. S'ource: ba sed on ECB 120088: 84)
. ....
Official target date for
euro adoption
As soon as possible
None
None
As soon as possible
As soon as possible
As soon as possible
None
None
Not before 2014
None
None
" f ~ -
!
I
:
Economic and Monetary Union
in a referendum in September 2000. The larger Danish political parties continue
ta support EMU, however, and the government is expected ta put this issue to the
vote once again by 2011.
The remaining EU member states are formaUy required under the Treaty to join the
euro area if and when they meet the convergence criteria. In practice, member states
retain a degree of discretion over the questions of whether and when to apply for mem-
bership of the euro area. Sweden, for example, voted against euro adoption in a ref-
erendum in September 2003 and has yet to participa te in ERM Il. For their part, EU
policy-makers have been fairly cautious about letting new members inta the euro club,
especiaUy those countries making the economically and financially turbulent transition
from central planning to a market economy. Lithuania's application for euro adoption,
for example, was rejected in May 2006 after it was deemed to have missed the Maastricht
inflation criterion by just 0.2 per cent. As of spring 2009 most of these member states
had not set an official target date for joining the euro area (see Table 7.3), although this
. situation could change as a result of the global financial crisis (see below).
Monetary policy-making under EMU
Prior to the euro's launch, monetary policy in the EU was determined by national
central banks (NCBs). Under EMU, NCBs have, along with the ECB, become
members of a new monetary authority, which is known as the Eurosystem. The
Eurosystem, in turn, is a subset of the European System of Central Banks (ESCB),
which also includes the NCBs of EU member states whose currency is not the
euro (An. 107 TEC). The primary responsibility of the Eurosystem is to define
and implement euro-area monetary policy (Art. 105 TEC). It also holds and
manages the offi cial foreign reserves of the member states, promotes the smooth
operation of the European paymems and settlements system and plays a central
role in euro-area exchange-rate policy. The Eurosystem's overarching objective
is to maintain price stability and, without prejudice to this goal, to support the
general economic policies of the Community (Art. 105 TEC) . The precise mean-
ing of 'price stability' is not defined in the Treaty (see below for the ECB's own
definition). The Treaty states that neither the ECB nor the NCBs should seek or
take instructions from Communi ty institutions, national governmems, or any
other body, thus ensuring a high degree of political independence for euro-area
monetary policy (Art. 108 TEC).
The responsibiliry for financials upervision in the euro area faUs not to the Eurosystem
but ta the individual member states, which ha ve agreed to build a single market for
financial services and to coardinate their supervisory practices (see Quaglia 2008).
The Eurosystem is required under the Treaty to contribute ta ' the smooth conduct of
policies pursued by the competent authorities relating ta the prudential supervision
of credit institutions and the stability of the financial system' (Art. 105). To this end, the
. ECB monitars and regularly reports on financial stability in the euro area. Responsibility
165
f o r o t h e r a s p e c t s o f f i n a n c i a l c r i s i s m a n a g e m e n t a n d r e s o l u t i o n i n t h e E U r e s t s w i t h
t h e n a t i o n a l s u p e r v i s o r y a u t h o r i t i e s , c e n t r a l b a n k s , a n d f i n a n c e m i n i s t r i e s . T o d e a l
w i t h c r o s s - b o r d e r f i n a n c i a l c r i s e s , t h e r e l e v a n t p a r t i e s h a v e s i g n e d a M e m o r a n d u i n o f
U n d e r s t a n d i n g , w h i c h s e t s o u t n o n - b i n d i n g p r i n c i p l e s f o r c o o p e r a t i o n , i n f o r m a t i o n
e x c h a n g e , a n d c o m m u n i c a t i o n .
T h e E u r o s y s t e m i s g o v e r n e d b y t w o c o n j o i n e d b o d i e s : t h e G o v e m i n g C o u n c i !
o f t h e E C B , w h i c h f o r m u l a t e s m o n e t a r y p o l i c y f o r t h e e u r o a r e a , a n d t h e E x e c u t i v e
B o a r d o f t h e E C B , w h i c h p r e p a r e s m e e t i n g s o f t h e G o v e m i n g C o u n c i ! a n d i m p l e -
m e n t s m o n e t a r y p o l i c y d e c i s i o n s ( A r t . 1 0 7 T E C ) . T h e G o v e r n i n g C o u n c i ! i n c l u d e s
m e m b e r s o f t h e E C B E x e c u t i v e B o a r d a n d t h e N C B g o v e m o r s o f e u r o - a r e a m e m b e r
s t a t e s . W h e n i t c o m e s t o t h e s e t t i n g o f s h o r t - t e r m i n t e r e s t r a t e s , e a c h m e m b e r o f t h e
G o v e r n i n g C o u n c i l p o s s e s s e s o n e v o t e a n d d e c i s i o n s a r e b a s e d o n a s i m p l e m a j o r -
i t y , a l t h o u g h i n p r a c t i c e c o n s e n s u s u s u a U y a p p l i e s . T h e E C B E x e c u t i v e B o a r d h a s a
P r e s i d e n t , a V i c e - P r e s i d e n t , a n d f o u r o t h e r m e m b e r s . M e m b e r s o f t h e E C B E x e c u t i v e
B o a r d a r e a p p o i n t e d f o r a n e i g h t - y e a r , n o n - r e n e w a b l e t e r m o f o f f i c e o n t h e b a s i s o f a
c o m m o n a c c o r d b y m e m b e r s t a t e s f o U o w i n g c o n s u l t a t i o n w i t h t h e E u r o p e a n P a r l i a -
m e n t ( E P ) a n d t h e E C B G o v e m i n g C o u n c i ! ( A r t . 1 1 , P r o t a c o l 1 B , T E C ) .
T h e E C B h a s l e g a l p e r s o n a l i t y ( A r t . 1 0 7 ) . I t c a n l i t i g a t e a n d b e l i t i g a t e d a g a i n s t
b e f o r e t h e E u r o p e a n C o u r t o f ] u s t i c e ( E C ] ) ( P r o t o c o l A r t . 3 5 ) . O n l y t h e E C ] , a n d
o n l y t h e n w i t h t h e p r i o r a p p r o v a l o f t h e E C B G o v e m i n g C o u n c i l , c a n r e q u e s t t h e
c o m p u l s o r y r e t i r e m e n t o f a n E C B E x e c u t i v e B o a r d m e m b e r w h o i s g u i l t y o f s e r i o u s
m i s c o n d u c t a r o t h e r w i s e i n b r e a c h o f t h e r e q u i r e m e n t s f o r t h e p e r f o r m a n c e o f h i s o r
h e r d u t i e s ( A r t . 1 1 , P r o t o c o l 1 B T E C ) . A s r e g a r d s o t h e r a s p e c t s o f a c c o u n t a b i l i t y , t h e
E C B i s r e q u i r e d t a p r e s e n t a n a n n u a l r e p o r t a n i t s a c t i v i t i e s t a t h e C o u n c i ! o f M i n i s -
t e r s a n d t h e E P ( A r t . 1 1 3 T E C ) . T h e E C B P r e s i d e n t i s a l s o r e q u i r e d t a a p p e a r b e f o r e
t h e r e l e v a n t c o m m i t t e e s o f t h e P a r l i a m e n t i f r e q u e s t e d t o d o 5 0 ( A r t . 1 1 3 T E C ) .
T h e E C B a s a n e c o n o m i c a c t o r
P o l i t i c a l i n d e p e n d e n c e i s c o m m o n p l a c e f o r m o d e m c e n t r a l b a n k s , b u t c e I l a i n a s p e c t s
o f t h e E C B ' s i n s t i t u t i o n a l d e s i g n a n d a p p r o a c h t a m o n e t a r y p o l i c y a r e n o t . F i r s t l y , t h e
E C B a r g u a b l y e n j o y s a h i g h e r d e g r e e o f i n d e p e n d e n c e t h a n m a n y o t h e r m o n e t a r y i n -
s t i t u t i o n s . W h e r e a s t h e U S F e d e r a l R e s e r v e A c t ( 1 9 9 3 ) , t h e B a n k o O a p a n A c t ( 1 9 9 7 ) ,
a n d t h e B a n k o f E n g l a n d A c t ( 1 9 9 7 ) c a n a U b e r e v i s e d b y a n a c t o f p a r l i a m e n t , t h e s t a t -
u t e s o f t h e E C B a r e e m b e d d e d w i t h i n a t r e a t y t h a t c a n b e c h a n g e d o n l y w i t h t h e c o n -
s e n t o f t h e E U m e m b e r s t a t e s s u b j e c t t a t h e u s u a l p r o c e s s o f r a t i f i c a t i o n . S e c o n d l y , t h e
E C B ' s d e f i n i t i o n o f p r i c e s t a b i l i t y - a r a t e o f i n f l a t i o n o f b e l o w b u t c l o s e t o 2 p e r c e n t
o v e r t h e m e d i u m t e r m - a r g u a b l y m a k e s i t m o r e t r a n s p a r e n t t h a n t h e F e d e r a l R e s e r v e
a n d t h e B a n k o f ] a p a n , w h i c h d o n o t h a v e q u a n t i t a t i v e d e f i n i t i o n s o f p r i c e s t a b i l i t y ,
b u t I e s s t r a n s p a r e n t t h a n t h e B a n k o f E n g l a n d , w h i c h h a s a s i m p l e r i n f l a t i o n t a r g e t o f
2 p e r c e n t . T h i r d l y , t h e E C B i s a c o m p a r a t i v e l y c o n s e r v a t i v e c e n t r a l b a n k i n s o f a r a s i t s
s t a t u t e s a t t a c h o v e r r i d i n g i m p o r t a n c e t a t h e p u r s u i t o f p r i c e s t a b i l i t y . I n c o n t r a s t , t h e
U S F e d e r a l R e s e r v e i s r e q u i r e d t a ' m a i n t a i n l o n g r u n g r o w t h o f t h e m o n e t a r ) ' a n d c r e d i t
I
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- F I G U R E 7 . 1 H a r m o n i z e d i n d e x o f c o n s u m e r p r i c e s , J a n . 1 9 9 9 " ' : O e c . 2 0 0 8
( p e r c e n t a g e c h a n g e o n p r e v i o u s p e r i o d )
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r o m o o o o o o o o m o o o o o o o o o N N N N N N N N N
- H I C P - O v e r a l l i n d e x
- - H I C P - A I I - i t e m s e x c l u d i n g e n e r g y
a n d u n p r o c e s s e d l o o d
S o u r c e : . E C B S t a t i s t i c a l D a t a W a r e h o u s e
N o t e : G D P a t 2 0 0 0 m a r k e t p r i e e s .
a g g r e g a t e s c o m m e n s u r a t e w i t h t h e e c o n o m y ' s l o n g r u n p o t e n t i a l t o i n c r e a s e p r o d u c -
t i o n , s o a s t o p r o m o t e e f f e c t i v e l y t h e g o a l s o f m a x i m u m e m p l o y m e n t , s t a b l e p r i c e s ,
a n d m o d e r a t e l o n g - t e r m i n t e r e s t r a t e s ' ( F e d e r a l R e s e r v e A c t , s e c t . 2 a ) .
T h e E C B w a s b r o a d l ) ' s u c c e s s f u l i n a c h i e v i n g i t s o b j e c t i v e s d u r i n g E M U ' s f i r s t
d e c a d e . T h e a n n u a l r a t e o f c o n s u m e r p r i c e i n f l a t i o n b e t w e e n 1 9 9 9 a n d 2 0 0 B w a s 2 . 2
p e r c e n t , w h i c h i s v e r y c 1 0 s e t o t h e E C B ' s o w n d e f i n i t i o n o f p r i c e s t a b i l i t ) ' ( s e e F i g u r e
7 . 1 ) . P r i c e s w e r e r e l a t i v e l y s t a b l e t h r o u g h o u t t h i s p e r i o d , w i t h t h e e x c e p t i o n o f a
t e m p o r a r y s u r g e i n i n f l a t i o n i n e a r l y 2 0 0 B d u e t a h i g h o i ! a n d [ o o d p r i c e s . T h e e u r o
a r e a ' s g r o w t h p e r f o r m a n c e d u r i n g t h i s p e r i o d w a s m o r e d i s a p p o i n t i n g . G D P g r o w t h
a v e r a g e d 2 . 1 p e r c e n t b e t w e e n 1 9 9 9 a n d 2 0 0 8 , w h i c h i s l o w b y h i s t o r i c a l s t a n d a r d s
a n d c o m p a r e d w i t h t h e p e r f o r m a n c e o f o t h e r i n d u s t r i a l i z e c l e c o n o m i e s ( T a b l e 7 . 4 ) .
T h e E C B h a s s o u g h t t o d i s t a n c e i t s e l f f r o m d e v e l o p m e m s i n t h e r e a l e c o n o m ) ' ,
b l a m i n g t h e e u r o a r e a ' s d i s a p p o i n t i n g g r o w t h p e r f o r m a n c e o n m e m b e r s t a t e s ' r e l u c -
t a n c e t o e m b r a c e s t r u c t u r a l r e f o r m s t h a t w o u l d , i n t e l " a l i a , m a k e i t e a s i e r t o a d j u s t
t o c h a n g i n g e c o n o m i c c o n d i t i o n s a n d t o r e a p t h e p r o d u c t i v i t y g a i n s a s s o c i a t e d w i t h
n e w t e c h n o l o g i e s ( E C B 2 0 0 B a : 6 B ) . F o r t h e m o s t p a r t , p o l i t i c a l l e a d e r s i n t h e E U
h a v e l a r g e l ) ' r e f r a i n e d f r o m p u b l i c c r i t i c i s m o f t h e E C B o u t o f r e s p e c t f o r i t s p o l i t i c a l
i n d e p e n d e n c e . A n o t a b l e e x c e p t i o n h a s b e e n N i c o l a s S a r k o z ) ' , w h o c o u r t e d c o n t r o -
v e r s ) ' b e f o r e a n d a f t e r h i s e l e c t i o n a s F r e n c h P r e s i d e n t i n M a y 2 0 0 7 b y r e p e a t e d l y
a c c u s i n g t h e E C B o f p a y i n g t o o m u c h a t t e n t i o n t o p r i c e s t a b i l i t ) ' a n d n o t e n o u g h t a
t h e e c o n o m i c s i t u a t i o n a n d t h e e x t e r n a l v a l u e o f t h e e u r o .
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168 Dermot Hodson
TABLE 7.4 Gross domestic product at 2000 market prices (average annual
percentage change)
1961-1970 1971-1980 1981-1990 1991-1998 1999-2008
Euro area 5.3 3.4 2.4 2.2 2.1
UK 2.8 2.0 2.7 2.3 2.6
USA 4.2 3.3 3.2 3.1 2.6
Japan 10.2 4.5 4.0 1.2 1.4
European Commission AMECO Database
The ECB as a political actor
Of the five modes of EU policy-making set out in Chapter 4, monetary policy-making
in the euro area is closest to the traditional Community method. The most striking
. similarities lay in the delegation of significant policy-making powers to the EU level
and the creation of a powerful supranational actor, the ECB. Like the Commission,
the ECB has a legal personality and the right to formulate opinions, deliver recom-
mendations, and make regulations on certain policies that faU within its sphere of
competences. Even more 50 than the Commission, the ECB's political authority is
closely linked to its credibility and technocratic expertise due, in part, to the intense
scrutiny of monetary-policy decisions by financial markets.
There are also some major differences between monetary policy-making in the euro
area and the traditional Community method. The ECB is a different kind of suprana-
tional actor [rom the Comnrission. ln the first place, the importance attached to central
bank independence in the Treaty means that there are fewer checks and balances on the
ECB. The EP can force the resignation of the coUege of Commissioners but, as noted
above, it can do little more than invite the ECB President to appear before its committees.
ln this sense, the EP's fonnal role in EMU is minor compared to some other areas of EU
policy-making. Another distinctive feature of the ECB is its comparatively decentralized
decision-making structure, which allows NCB govemors and members of the ECB Ex-
ecutive Board to decide on monetary policy in the ECB Goveming Council.
A striking feature of the ECB's evolution as a political actor over the last decade
has been its uneven and at times uneasy relationship with other EU institutions. A
surprising development has been the ECB's dealings with the EP's 'monetary dia-
logue' . Under this informal arrangement, the ECB President (or other members of
the Executive Council) appears before the EP's Economic and Monetary Affairs Com-
mittee four times per year to discuss the economic situation and policy chaUenges
facing the euro area. Although expectations conceming the monetary dialogue were
low, it has proved ta be an institutional win-win, giving the ECB an opportunity to
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d e m o n s t r a t e i t s r e s p e c t f o r t h e E U ' s d i r e c t l y - e l e c t e d c h a m b e r a n d t h e E P a c h a n c e t o
( b e s e e n t o ) h o l d t h e E C B t o a c c o u n t .
A l o w p o i n t i n t h e E C B ' s i n t e r - i n s t i t u t i o n a l r e l a t i o n s o c c u r r e d i n 2 0 0 0 w h e n t h e
E C ] o v e r t u r n e d t h e b a n k ' s d e c i s i o n t a e s t a b l i s h i t s o w n i n t e r n a l a n t i - f r a u d s c h e m e
r a t h e r t h a n l e a v e t h i s m a t t e r t o t h e E u r o p e a n A n t i - F r a u d O f f i c e ( O L A F ) , w h i c h
m o n i t a r s t h e f i n a n c i a l d e a l i n g s o f o t h e r C o m m u n i t y b o d i e s , o f f i c e s , a n d a g e n c i e s .
I n i t s d e f e n c e , t h e E C B h a d a r g u e d , f i r s t l y , L h a t i t h a d a l e g a l p e r s o n a l i t y t h a t w a s
d i s t i n c t f r o m b o d i e s , o f f i c e s , a n d a g e n c i e s o f t h e C o m m u n i t y a n d , s e c o n d l y , t h a t
o p e n i n g i t s d o o r s t o O L A F c o n t r a v e n e d t h e E C B ' s i n d e p e n d e n c e , a s g u a r a n t e e d b y
A r t i c l e 1 0 8 T E C . T h e E C ] ' s O L A F j u d g m e n t o f 2 0 0 3 r e j e c t e d b O L h a r g u m e n t s , c o n -
c 1 u d i n g t h a t t h e E C B ' s l e g a l p e r s o n a l i t y w a s n o t d i s t i n c t f r o m t h a t o f t h e C o m m u n i t y
a n d t h a t t h e T r e a t y ' s p r o v i s i o n s o n i n d e p e n d e n c e r e l a t e d s p e c i f i c a l l y t a m o n e t a r y
p o l i c y a n d d i d n o t ' h a v e t h e c o n s e q u e n c e o f s e p a r a t i n g i t e n t i r e l y f r o m t h e E u r o p e a n
C o m m u n i t y a n d e x e m p t i n g i t [ r o m e v e r y r u l e o f C o m m u n i t y l a w ' . A s G o e b e l ( 2 0 0 6 )
a r g u e s , t h i s j u d g m e n t i s a l a n d m a r k o n e f o r E M U a s i t e s t a b l i s h e s t h e p r i n c i p l e t h a L
t h e E C B i s a n i n t r i n s i c p a r t o f t h e C o m m u n i t y a n d n o t , a s s o m e h a v e a r g u e d , l e g a l l y
s e p a r a t e f r o m i t . T h e 2 0 0 7 L i s b o n T r e a t y ( T o L ) , w i l l r e i n f o r c e t h i s p o i n t b y i n c l u d i n g
L h e E C B u n d e r t h e l i s t o f E U i n s t i t u t i o n s ( A r t . 1 8 T o L ) .
T h e r e l a t i o n s h i p b e t w e e n t h e E C B a n d t h e N C B s h a s a l s o e v o l v e d d u r i n g t h e f i r s t
d e c a d e . A s t h e e u r o a r e a e n l a r g e s , m o r e a n d m o r e N C B g o v e r n o r s w i l l j o i n t h e E C B
G o v e r n i n g C o u n c i l . F e a r s t h a t t h i s m i g h t d r o w n o u t t h e v o i c e s o f t h e E C B E x e c u -
t i v e B o a r d p r o m p t e d m e m b e r s t a t e s t a a g r e e o n a n e w v o t i n g s y s t e m f o r m o n e t a r y
p o l i c y d e c i s i o n s , b a s e d o n r o t a t i o n . T h i s a g r e e m e n t , w h i c h w a s r a t i f i e d i n M a y 2 0 0 4
b u t w h i c h i s u n l i k e l y t a e n t e r i n t o f o r c e u n t i l e u r o - a r e a m e m b e r s h i p e x c e e d s e i g h t -
e e n c o u n t r i e s , w i l l c a p t h e t o t a l n u m b e r o f v o t e s o n t h e E C B G o v e r n i n g C o u n c i l
a t t w e n t y - o n e . E x e c u t i v e B o a r d m e m b e r s w i l l r e t a i n t h e i r s i x v o t i n g r i g h t s p e r m a -
n e n t l y , w i t h t h e r e m a i n i n g f i f t e e n v o t i n g r i g h t s b e i n g r o t a t e d a m o n g N C B g o v e r n o r s
a c c o r d i n g t a a f o r m u l a d e s c r i b e d i n T a b l e 7 . 5 .
I t r e m a i n s t a b e s e e n w h e t h e r t h i s n e w v o t i n g s y s t e m w i l l s u f f i c e . M a k i n g m o n e t a r y
p o l i c y b y c o m m i t t e e c a n l e a d t a b e t t e r - i n f o r m e d a n d l e s s i d e o l o g i c a l l y d r i v e n d e c i s i o n -
m a k i n g ( B l i n d e r 2 0 0 7 ) b u t i t c a n a l s o s l o w t h e s p e e d a t w h i c h a c e n t r a l b a n k r e a c t s t o
c r i s e s ( G r o s 2 0 0 3 ) . W i t h r w e n t y - o n e v o t i n g m e m b e r s , t h e E C B G o v e r n i n g C o u n c i l w i l l
s t i l l b e c o n s i d e r a b l y l a r g e r t h a n i t s c o u n t e r p a r t s : t h e U S F e d e r a l R e s e r v e O p e n M a r k e t s
C o m m i t t e e h a s t w e l v e v o t i n g m e m b e r s , c o m p a r e d w i t h n i n e o n t h e B a n k o f E n g l a n d ' s
M o n e t a r y P o l i c y C o m m i t t e e a n d e i g h t o n t h e P o l i c y B o a r d o f t h e B a n k o f ] a p a n .
E c o n o m i c p o l i c y - m a k i n g u n d e r E M U
A s d i s c u s s e d i n C h a p t e r 4 , e c o n o m i c p o l i c y - m a k i n g i n E M U i s a t t h e f o r e f r o m o f
t h e E U ' s e f f o r t s L o p r o m o t e p o l i c y c o o r d i n a t i o n . I n c o n t r a s t t o t h e m o n e t a r y s p h e r e ,
t h e r e h a s b e e n n o s i g n i f i c a n t d e l e g a t i o n o f e c o n o m i c p o l i c y - m a k i n g p o w e r s t a t h e
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E U l e v e l u n d e r E M U . I n s t e a d , i t f a l l s t a E c o f i n ( a n d , a s d i s c u s s e d b e l o w , t h e E u r o -
g r o u p ) t o b u i l d c o n s e n s u s o n t h e p r i o r i t i e s f o r e c o n o m i c p o l i c y i n t h e e u r o a r e a a n d
t a L h e i n d i v i d u a l m e m b e r s t a t e s t o d e d d e h o w t h e y p l a n t o m e e t t h e s e p r i o r i t i e s . T h e
T r e a t y ' s p r i n c i p a l i n s t r u m e n t o f c o o r d i n a t i o n i s t h e B E P G s , w h i c h t a k e t h e f o r m o f
n o n - b i n d i n g g u i d e l i n e s f r o m E c o f i n t a m e m b e r s t a t e s o n m a c r o e c o n o m i c p o l i c i e s
a n d s t r u c t u r a l r e f o r m s . T h e C o m m i s s i o n ' s m o d e s t b u t n o n e t h e l e s s i m p o r t a n t r o l e i n
t h i s s e t - u p i s t o e v a l u a t e m e m b e r s t a t e s ' e c o n o m i c - p o l i c y p l a n s a n d t o m o n i t o r t h e i r
i m p l e m e n t a t i o n o n b e h a l f o f E c o f i n . I n t h e e v e n t o f n o n - c o m p l i a n c e , t h e C o m m i s -
s i o n c a n s o u n d t h e a l a r m b u t i t u l t i m a t e l y f a l l s t a E c o f i n t o i s s u e l e g a l l y n o n - b i n d i n g
r e c o m m e n d a t i o n s f o r c o r r e c t i v e a c t i o n a g a i n s t t h e c o u n t r y i n q u e s t i o n . T h e s e r e c -
o m m e n d a t i o n s c a n b e u n d e r s t o o d a s a f o r m o f p e e r p r e s s u r e t h a t i s d e s i g n e d t o
n a m e , s h a m e , a n d b l a m e t h e m e m b e r s t a t e i n t a r e v e r s i n g i t s e c o n o m i c p o l i c i e s .
T h e T r e a t y p r o h i b i t s m e m b e r s t a t e s f r o m r u n n i n g e x c e s s i v e b u d g e t d e f i c i t s ( A r t .
1 0 4 T E C ) , d e f i n e d a s a n n u a l g o v e r n m e n t b o r r o w i n g i n e x c e s s o f 3 p e r c e n t o f G D P
a n d g e n e r a l g o v e r n m e n t d e b t i n e x c e s s o f 6 0 p e r c e n t o f G D P ( P r o t o c o l 2 0 T E C ) .
T h e C o m m i s s i o n h a s p r i m a r y r e s p o n s i b i l i t y f o r m o n i t o r i n g m e m b e r s t a t e s ' b u d g e t -
a r y p o l i c i e s , a l t h o u g h i t u l t i m a t e l y f a l l s t o E c o f i n t o d e c i d e b y q u a l i f i e d m a j o r i t y
v o t e , o n t h e b a s i s o f a C o m m i s s i o n r e c o m m e n d a t i o n , w h e t h e r a n e x c e s s i v e d e f i c i t
e x i s t s . A s i n t h e c a s e o f t h e B E P G s , E c o f i n a p p l i e s p e e r p r e s s u r e i r i t h e f o r m o f l e -
g a l l y n o n - b i n d i n g r e c o m m e n d a t i o n s a g a i n s t m e m b e r s t a t e s t h a t f a i l t a c o r r e c t a n
e x c e s s i v e d e f i c i t . I n t h e c a s e o f e u r o - a r e a m e m b e r s , E c o f i n c a n a l s o i m p o s e f i n a n c i a l
p e n a l t i e s a n d f i n e s b u t s u c h m e a s u r e s c a n o n l y b e u s e d i n e x t r e m i s . T h e t i m e t a b l e f o r
e n f o r c i n g t h e e x c e s s i v e d e f i c i t p r o c e d u r e i s s e t o u t i n t h e ' c o r r e c t i v e a r m ' o f t h e S G P .
T h e ' p r e v e n t i v e a r m ' o f t h i s a g r e e m e n t e n c o u r a g e s m e m b e r s t a t e s t a p u r s u e b a l a n c e d
b u d g e t s o v e r t h e m e d i u m t e r m .
E M U a n d p o l i c y c o o r d i n a t i o n
H o w c a n w e e x p l a i n m e m b e r s t a t e s ' r e l u c t a n c e t o a p p l y t h e t r a d i t i o n a l C o m m u n i t y
m e t h o d t a e c o n o m i c p o l i c y - m a k i n g u n d e r E M U ? F o r s o m c s c h o l a r s , t h e e x p l a n a t i o n
l i e s i n t h e d e s i r e o f t h e f r a m e r s o f t h e T r e a t y t o p r o t e c t t h e p o l i t i c a l i n d e p e n d e n c e o f
t h e E C B b y k e e p i n g e c o n o m i c d e c i s i o n - m a k i n g o n a d e c e n t r a l i z e d f o o t i n g ( D y s o n
2 0 0 0 ) . B u t i e t a l . ( 2 0 0 3 : 1 0 1 ) e m p h a s i z e s o v e r e i g n t y c o n c e r n s , a r g u i n g t h a t t h e E U ' s
c u r r e n t p r o v i s i o n s o n e c o n o m i c - p o l i c y c o o r d i n a t i o n r e f l e c t t h e l i m i t s o f w h a t c a n b e
a c h i e v e d g i v e n m e m b e r s t i l t e s ' l i m i t e d d e s i r e f o r d e e p e r i n t e g r a t i o n i n t h i s f i e l d . O n
a s i m i l a r n o t e , H i x ( 2 0 0 5 : 3 8 ) a r g u e s t h a l ' i f m e m b e r s t a t e s w e r e s e r i o u s a b o U l p o l i c y
r e f o r m i n a p a r t i c u l a r a r e a , t h e n t h e c l a s s i c E U m e t h o d w o u l d p r o b a b l y b e t h e m o s t
e f f i c i e n t w a y o f a c h i e v i n g t h e p o l i c y g o a l s ' .
A n a l t e r n a t i v e v i e w p o i n t i s t h a t n e w m o d e s o f E U g o v e r n a n c e m a y b e f u n c t i o n -
a U y s u i t e d t a E M U ( H o d s o n a n d M a h e r 2 0 0 1 ) . F r o m a n e c o n o m i c p e r s p e c t i v e , a
d e c e n t r a l i z e d a p p r o a c h t o p o l i c y c o o r d i n a t i o n m a y b e d e s i r a b l e i f i t g i v e s m e m b e r
s t a t e s g r e a t e r l e e w a y t o u s e n a t i o n a l b u d g e t a r y p o l i c y t o a d j u s t t a c o u m r y - s p e c i f i c
s h o c k s . L i k e w i s e , a l l o w i n g m e m b e r s t a t e s t o t a i l o r s p e c i f i c r e f o r m m e a s u r e s t a t h e
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d
172 Dermot Hodson
institutional specificities of national product, labour, and capital markets may be
preferable to a one-size-fits-all approach. From a legal perspective, soft law may be
preferable to hard law when policy goals lack precision and when the probability of
revising these objectives in the future is high (Hodson and Maher 2004).
How has EMU's experiment with new modes of EU governance fared over its
first decade? From a bird's eye perspective, the early years of EMU coincided with
a sustained improvement in the euro-area's public finances, with a budget surplus
being recorded in 2000 for the first time since the early 1970s. In the structural
domain, EMU has acted as a powerful catalyst for financial integration. As regards
product- and labour-market reforms, member states implemented a series of m e a s ~
ures to make employment protection legislation less stringent, to raise average
retirementages, and to introduce greater competition in some sec tors, most noticeably
telecommunications (see Chapters 6, 11, and 16). Ihese reforms contributed to
rising labour-force participation rates, falling unemployment, and, in some sectors,
falling prices (ECB 2008a). Progress in product- and labour-market reform has also
been matched by significant progress in financial-market integration. In spite of
these achievements, serious difficulties were encountered with the implementation
of the SGP and the BEPGs in their original incarnations.
Ihe problems with the SGP began when some member states failed to reduce their
government borrowing sufficiently during the economic upturn of the late 1990s in
spite of periodic pleas to do 50 by the Commission and Ecofin. As a consequence,
several govemments, including those of France and Germany, entered the economic
slowdown of 2001-2 without having first achieved medium-term budgetary posi-
tions of close to balance or in surplus. Ihis deficiency in the preventive arm of the
pact soon caused problems for the corrective arm, as rising expenditure and falling
revenues brought govemment borrowing in these countries in excess of 3 per cent
of GDP. Ihis put Ecofin in the awkward position of encouraging member states to
reduce their govemment borrowing so as to comply with the SGP in the knowledge
that such measures could prolong the economic slowdown by further dampening
aggregate demand.
Ihe resulting tensions came to a head in November 2003 when Ecofin met to
consider a set of Commission recommendations against France and Germany under
Article 104 of the Ireat)'. Ihe first recommendation noted French and German
failure 10 take effective action 10 correct excessive deficit in spite of earlier recom-
mendations (Art. 104(8) TEC). Ihe second recommendation called on Ecofin to
'give notice' to France and Germany to undertake specific deficit reductions within
a specified time frame (Art. 104(8) IEC). Ihese recommendations were significant
because if adopted they would have raised the distinct possibility that the pecuniary
sanctions set out under Article 104(11) of the Ireaty would be employed for the very
first time. After lengthy negotiations, a group of mainly smaller member states with
a reputation for fiscal discipline, including Austria, Belgium, Ihe Netherlands, and
Spain, that favoured the recommendations was outvoted by a coalition of mainly
large member states, which included four countries that were themselves in a state
...
Economic and Monetary Uni on 173
of excessive deficit, France, Germany, Italy; and Portugal. Having failed to find a
quali:fied majority in support of the Commission's recommendations, Ecofin voted
to leave disciplinaryprocedures against France and Germany 'in abeyance' for the
time being. Ihe EC]'s 5tability and Growth Pact judgment in July 2004 overturned
this decision, but the damage to the credibility ofEMU's fiscal rules was already done
(Maher 2004).
Member governments pushed through a number of important structural reforms
during the early years of EMU bu t the overall pace of reform was insufficient to allay
concems about the adaptability of euro-area product and labour markets. These
concerns were compounded by the slow response of relative prices and wages to
economic conditions in the euro area and the persistence of cross-country inflation
and growth differentials (Commission 2006a). Ihe BEPGs were partly 10 blame for
this slow pace of structural reform. Policy-makers at the EU and nationallevel were
reluctant to 1 ! e the guidelines as an instrument to name, shame, and blame reform
laggards and the accumulation of an excessive number of guidelines ma de it difficult
10 establish clear reform priorities (Deroose et al. 2008).
Ihe March 2005 reforms to the SGP and Lisbon Strategy continued rather than
abandoned the EU's experiment with new modes of EU policy-making. Ihe revised
pact is a 'softer' version of the original agreement in two key respects. Firstly, the
importance of peer pressure over pecuniary sanctions has been increased by allow-
ing Ecofin more time to issue non-binding recommendations for corrective action
before resorting to financial penalties and fines. Ihis makes it highly unlikely that
financial penalties will be imposed on euro-area member states, thus reducing the
possibility of a budgetary stand-offbetween the EU and national governments of the
kind that led to the collapse of the original pact in November 2003. Secondly, greater
flexibility has been introduced into the pact's preventive arm by replacing the com-
mon goal of achieving a budgetary position of close to balance or in surplus with
country-specific medium-term budgetary objectives. Both the revised SGP and the
relaunched Lisbon Strategy promote a more decentralized approach to peer pressure.
In the case of the former, the European Council encouraged national parliaments to
pa)' closer attention 10 member states' stability programmes. In the case of the latter,
the European Counci! invited member states to involve national parliaments and .
other relevant stakeholders in the preparation of annually updated national reform
programmes.
Initial reports that the March 2005 reforms had irretrievably weakened the SGP
were overstated (Feldstein 2005). France and Germany recorded a marked improve-
ment in their fise al positions in 2006, allowing Ecofin to revoke the excessive deficit
procedure against these countries in the first half of 2007. Buoyant economic growth
undoubtedly played a role here but so too did a renewed commitment to the correc-
. tive arm of the pact, particularl)' in Germany which increased value-added tax (VAI )
in January 2007 in an effort 10 gets its budgetary house in order. Ihe relaunched
Lisbon Strategy also fared better than some had expected (Pisani -Ferry and Sapir
2007). In Decelllber 2007, the Commission (2007d) reported modest increases in
! 1
1 7 4 D e r r n o t H o d s o n
p o t e n t i a l g r o w t h a n d t h e l o w e s t u n e m p l o y m e n t s i n c e t h e m i d - 1 9 8 0 s a s t e n t a t i v e
e v i d e n c e t h a t t h e E U ' s e c o n o m i c - r e f o r m a g e n d a w a s b e g i n n i n g t o b e a r f r u i t .
T h e e m e r g e n c e o f t h e E u r o g r o u p
A k e y p i e c e o f E M U ' s g o v e r n a n c e j i g s a w i s t h e E u r o g r o u p . T h i s i n f o r m a l b o d y b r i n g s
e u r o -
a r e a
f i n a n c e m i n i s t e r s i n a d v a n c e o f t h e E c o f i n t o d i s c u s s t h e e c o n o m i c s i t u a -
t i o n a n d s h a r e d p o l i c y c h a l l e n g e s . O n e f i n a n c e m i n i s t e r a n d o n e a d v i s e r f r o m e a c h
e u r o - a r e a c o u n t r y a t t e n d t h e E u r o g r o u p a l o n g w i t h t h e P r e s i d e n t o f t h e E C B a n d t h e
C o m m i s s i o n e r f o r e c o n o m i c a n d m o n e t a r y a f f a i r s . M e e t i n g s a r e c o n f i d e n t i a l a n d ,
a s i d e f r o m t h e o c c a s i o n a l c o m m u n i q u e , t h e E u r o g r o u p p r o d u c e s f e w v i s i b l e p o l i c y
o u t p u t s .
T h e E u r o g r o u p ' s u n u s u a l i n s t i t u t i o n a l d e s i g n r e f l e c t s a F r a n c o - G e r m a n
c o m p r o m i s e o n t h e n e e d f o r e c o n o m i c p o l i c y c o o r d i n a t i o n u n d e r E M U ( P i s a n i -
F e r r y 2 0 0 6 ) . I n a d v a n c e o f E M U , F r a n c e r e p e a t e d l y m a d e t h e c a s e f o r a g o u v e r n e m e n t
e c o n o m i q u e t o s t e e r e c o n o m i c d e c i s i o n - m a k i n g u n d e r E M U a n d p r o v i d e a p o l i t i c a l
c o u n t e r w e i g h t t o t h e E C B ( H o w a r t h 2 0 0 7 b ) . G e r m a n y c o n s i s t e n t l y o p p o s e d s u c h
p r o p o s a l s f o r f e a r t h a t t h e y w e r e i n t e n d e d a s a c o v e r t a t t a c k o n t h e i n d e p e n d e n c e o f
t h e E C B . I n a d e a l s t r u c k a t t h e E u r o p e a n C o u n c i ! i n D e c e m b e r 1 9 9 7 , m e m b e r s t a t e s
a g r e e d t h a t e u r o - a r e a f i n a n c e m i n i s t e r s c o u l d m e e t i n f o r m a l l y a m o n g t h e m s e l v e s
b u t t h a t t h i s b o d y w o u l d m e e t b e h i n d c 1 0 s e d d o o r s a n d h a v e n o d e c i s i o n - m a k i n g
p o w e r s . T h e E u r o g r o u p ' s w o r k i n g m e t h o d s h a v e b e e n d e s c r i b e d b y P u e t t e r ( 2 0 0 6 )
a s a f o n n o f ' d e l i b e r a t i v e i n t e r g o v e r n m e n t a l i s m ' . H e a r g u e s t h a t , i n t h e a b s e n c e o f
f o r m a l d e c i s i o n - m a k i n g r e s p o n s i b i l i t i e s , t h e E u r o g r o u p c a n e x c h a n g e i n f o r m a t i o n
o n s h a r e d p o l i c y c h a l l e n g e s a n d r e f l e c t o n n a t i o n a l p o l i c y p o s i t i o n s i n a w a y t h a t
w o u l d n o t b e p o s s i b l e i n a b u s y b a r g a i n i n g c h a m b e r s u c h a s E c o f i n .
O v e r t h e p a s t d e c a d e , t h e E u r o g r o u p h a s e m e r g e d a s a p o w e r f u l c a u c u s w i t h i n
t h e E c o f i n ( P i s a n i - F e r r y 2 0 0 6 ) . T o d a y , i t i s t h e E u r o g r o u p , n o t E c o f i n , w h i c h t a k e s
t h e l e a d i n m o n i t o r i n g e u r o - a r e a m e m b e r s ' c o m p l i a n c e w i t h t h e S G P . T h e E u -
r o g r o u p a l s o t a k e s a k e e n i n t e r e s t i n t h e L i s b o n S t r a t e g y , s t r u c t u r i n g i t s r e g u l a r
d i s c u s s i o n s o f s t r u c t u r a l - r e f o r m c h a l l e n g e s a r o u n d t h e E u r o p e a n C o m m i s s i o n ' s
a n n u a l p r o g r e s s r e p o r t o n g r o w t h a n d j o b s . I n s o m e c i r c u m s t a n c e s E u r o g r o u p d i s -
c u s s i o n s h a v e h a d i m p l i c a t i o n s f o r t h e E U a s a w h o l e , t h u s a d d i n g t a t h e p o l i t i c a l
c o s t s o f r e m a i n i n g o u t s i d e t h e e u r o a r e a . A c a s e i n p o i n t i s t h e M a r c h 2 0 0 5 r e f o r m
o f t h e S G P , w h i c h w a s a d o p t e d i n E c o f i n o n t h e b a s i s o f a d e a l t h a t h a d b e e n b r o -
k e r e d i n t h e E u r o g r o u p .
T h e s w i t c h f r o m a r o t a t i n g t a a p e r m a n e n t c h a i r h a s b e e n a k e y f a c t o r i n t h e E u r o -
g r o u p ' s d e v e l o p m e n t . I n t h e e a r l y y e a r s o f E M U , t h e c h a i r w a s f i l l e d b y t h e P r e s i d e n t
o f E c o f i n o r t h e f i n a n c e m i n i s t e r o f t h e n e x t e u r o - a r e a m e m b e r i n l i n e f o r t h i s p o s t
i n c a s e s w h e r e a n o n - e u r o - a r e a c o u n t r y h e l d t h e E U C o u n c i ! p r e s i d e n c y . l n 2 0 0 5 ,
t h e E u r o g r o u p e l e c t e d J e a n - C l a u d e J u n c k e r f o r a t w o - y e a r t e r m o f o f f i c e , w h i c h w a s
r e n e w e d i n 2 0 0 7 a n d a g a i n i n 2 0 0 9 . T h o u g h h i s p e n c h a n t f o r p r o v o c a t i v e p u b l i c
s t a t e m e n t s h a s c a u s e d c o n t r o v e r s y o n o c c a s i o n , J u n c k e r h a s a r g u a b l y i n c r e a s e d t h e
. .
p o l i t i c a l p r o f i l e o f t h e E u r o g r o u p t h a n k s t o h i s c o n s i d e r a b l e p o l i t i c a l e x p e r i e n c e ( h e
w a s a s i g n a t o r y o f t h e T E U a n d c o m b i n e s t h e r o l e s o f f i n a n c e m i n i s t e r a n d p r i m e
m i n i s t e r o f L u x e m b o u r g ) .
T h e E u r o g r o u p ' s t r a c k r e c o r d a s a d e l i b e r a t i v e b o d y i s m i x e d . O n s o m e i s s u e s ,
s u c h a s f i s c a l r e s p o n s e s t o h i g h o i I p r i c e s , e u r o - a r e a f i n a n c e m i n i s t e r s h a v e m a n a g e d
t a p u r s u e a r e l a t i v e l y c o h e r e n t l i n e ( P i s a n i - F e r r y 2 0 0 6 ) . O n o t h e r i s s u e s , i n c l u d i n g
t h e e x t e r n a l v a l u e o f t h e e u r o , p o l i c y l i n e s h a v e b e e n a g r e e d b u t n o t a l w a y s a d h e r e d
t o b y e u r o - a r e a f i n a n c e m i n i s t e r s ( v a n d e n N o o r d e t a l . 2 0 0 8 ) . F u r t h e r m o r e , p e r i o d i c
p u b l i c c r i t i c i s m o f E C B m o n e t a r y p o l i c y b y s o m e e u r o - a r e a f i n a n c e m i n i s t e r s o v e r
t h e p a s t d e c a d e s h o w s t h a t t h e E u r o g r o u p h a s n o t a l w a y s s u c c e e d e d i n i t s e f f o r t s t o
k e e p d i s c u s s i o n s o f t h e m a c r o e c o n o m i c p o l i c y m x b e h i n d c l o s e d d o o r s . T h e e n -
l a r g e m e n t o f t h e e u r o a r e a m a y a l s o h a v e r e d u c e d t h e i n t i m a c y o f t h e E u r o g r o u p b y
a d d i n g f i v e n e w m i n i s t e r s ( e a c h w i t h h i s o r h e r o w n a d v i s e r ) t o t h e c i r e l e s i n c e 2 0 0 l .
T h e r e m a y a l s o b e a I i n k b e t w e e n t h e f o r m a l i z a t i o n o f t h e E u r o g r o u p a n d i t s l i m i t a -
t i o n s a s a d e l i b e r a t i v e b o d y s i n c e , a s B e g g ( 2 0 0 8 a ) a r g u e s , t h e d y n a m i c s o f d e b a t e
a n d t h e v a l u e o f p e e r p r e s s u r e w i l l c h a n g e a s t h e E u r o g r o u p e x p a n d s .
T h e f o r m a l i z a t i o n o f t h e E u r o g r o u p i s I i k e l y t a c o n t i n u e f o r t h e t i m e b e i n g .
U n d e r t h e T o L , t h e E u r o g r o u p w i l l b e o f f i c i a l l y r e c o g n i z e d , a l t h o u g h i t s p r e c i s e
l e g a l s t a t u s w i l l n o t b e d e f i n e d ( P r o t o c o l o n t h e E u r o g r o u p , T o L ) . T h e T r e a t y w i l l
a l s o r e c o g n i s e t h e r o l e o f t h e E u r o g r o u p P r e s i d e n t , w h o s e t e r m o f o f f i c e w i l l b e
e x t e n d e d f r o m t w o t o t w o - a n d - a - h a l f y e a r s . T h e E u r o g r o u p w i l l a l s o b e g i v e n
d e - f a c t o d e c i s i o n - m a k i n g p o w e r s b y a l l o w i n g t h e f i n a n c e m i n i s t e r s o f m e m b e r
s t a t e s w h o s e c u r r e n c y i s t h e e u r o t o a d o p t t h o s e a s p e c t s o f t h e B E P G s t h a t r e l a t e
g e n e r a l l y t o t h e e u r o a r e a ( A r t . 1 3 9 ( 2 ) T o L ) . T h e f a c t t h a t t h e T o L d i d n o t g o f u r t h e r
i n t h i s a r e a i s n o s u r p r i s e : i t s f r a m e r s w e r e c o n t e n t t o ' c u t a n d p a s t e ' t h e C o n -
s t i t u t i o n a l T r e a t y ' s p r o v i s i o n s o n e c o n o m i c - p o l i c y c o o r d i n a t i o n , w h i c h i n e s s e n c e
s o u g h t t a p r e s e r v e t h e s t a t u s q u o i n t h i s h i g h l y s e n s i t i v e a r e a o f p o l i c y - m a k i n g ( s e e
P u e t t e t 2 0 0 7 ; a n d H o d s o n 2 0 0 9 ) .
T h e e u r o a r e a a s a g l o b a l a c t o r
T h e e u r o i s a m a j o r g l o b a l c u r r e n c y t h a t i s s e c o n d o n l y t o t h e U S d o l l a r . l n 2 0 0 7 , f o r
e x a m p l e , t h e e u r o a c c o u n t e d f o r 2 7 p e r c e n t o f t h e f o r e i g n - e x c h a n g e r e s e r v e s h e l d
b y t h e w o r l d ' s c e n t r a l b a n k s c o m p a r e d w i t h 6 4 p e r c e n t f o r t h e U S d o l l a r , 4 . 7 p e r
c e n t f o r t h e B r i t i s h p o u n d a n d 2 . 9 p e r c e n t f o r t h e j a p a n e s e y e n ( E C B 2 0 0 8 b ) . T h e
e u r o a l s o s e r v e s a s a n c h o r o r r e f e r e n c e c u r r e n c y f o r t h e e x c h a n g e - r a t e p o l i c y o f f o r t y
c o u n t r i e s ( C o m m i s s i o n 2 0 0 8 e ) . A l t h o u g h e c o n o m i s t s a r e d i v i d e d o n w h e t h e r t h e
e u r o w i l l e v e r o v e r t a k e t h e d o l l a r , t h e e u r o a r e a h a s a l r e a d y b e c o m e a m a j o r p r e s e n c e
o n t h e g l o b a l e c o n o m i c s t a g e ( C o h e n 2 0 0 3 ; M e n z i e a n d F r a n k e I 2 0 0 8 ) .
T h e T r e a t y s a y s l i t t l e a b o u r t h e e u r o a r e a ' s g l o b a l e c o n o m i c r o l e . P e r h a p s t h e m o s t
i m p o r t a n t p r o v i s i o n c o n c e r n s t h e f o r m u l a t i o n o f e x c h a n g e - r a t e p o l i c y , w h i c h i s a
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176 Dermot Hodson
shared responsibili.ty of the Ecoftn and the ECB (Art. 111 TEC). This arrangement
gives the ECB a more powerful role in exchange-rate policy than many other central
banks; the US Federal Reserve and the Bank oOapan must defer lO their respective
finance ministries on such matters. lnterventions in exchange-rate markets have
been a rare occurrence under EMU. In September and November 2000, the ECB
intervened ta boost the euro following a sustained depreciation in the value of the
currency, but it resisted attempts to take action in response ta the euro's marked
appreciation against the US dollar after mid-2002.
In December 1998, the European Council in Vienna acknowledged the 'global
responsibilities' of the euro and the necessity of speaking with one voiee on
international issues. In spite of this commitment, the euro area's representation in
multilateral financial institutions remains fragmented and incoherent. A case in
point concerns euro-area representation at the International Monetary Fund (IMF).
Whereas economie giants such as the United States appoint a sin,gle Executive Direc-
tor to the IMF Executive Board, the body that runs the IMF on a daily basis, euro-
area countries send national representatives only. This pic ture is further complicated
by the fact that only France and Germany make direct appointments to the IMF
Executive Board, with the remaining euro-area members represented by an Execu-
tive Director who speaks for a constituency of countries from both inside and out-
side the EU. The Netherlands, for example, belongs to a constituency that includes
Ukraine and Israel, while Spain is grouped with Mexico, Venezuela, and several
other Latin American countries. The complexity of these arrangements makes it dif-
ficult for euro-area countries to exert collective influence in the IMF in spite of the
global significance of the single currency.
EMU and the global financial crisis
The world economy experienced financial turmoi! in 2007 and 2008 on a scale that
had not been witnessed since the Wall Street Crash of 1929. The trigger for this tur-
moil was the collapse of the US sub-prime-Ioan market in August 2007 after borrow-
ers who had been granted loans in spite of their poor credit ratings struggled to make
repayments as house prices plummeted. Globallosses from this crisis-around $1.4
trillion according ta the International Monetary Fund (2008: 14)-sowed the seeds
for a global credit crunch as inter-bank markets froze and loans to businesses and
individuals dried up. These events took their toll on the real economy, with global
growth experiencing a sharp slowdown in 2008 whil e the USA, ]apan, and, for the
very hrst time, the euro area entered recession.
Although the global financial crisis had not run its course at the time of wri ting
(summer 2009) , the turmoi! ilIustrated some of the strengths and weaknesses of
the EUs system of economic and fi nancial governance. Above ali, it demonstrated
Europe's vulnerabilit)' to global economic developments in an age of financial
globalitation. The credit crunch that began in the USA in August 2007 claimed a
number of European casualti es, including Northern Rock, the first British bank to
experience a run since 1866. Similarly, the banking crisis that took hold in the USA
in September 2008 spread ta the EU within a matter of days, prompting authorities
in Belgium, France, Germany, Luxembourg, The Netherlands, and the UK to rescue
distressed financial institutions.
The crisis also laid bare the limitations of policy coordination among sovereign
governments. In September 2008, the Irish government unexpectedly announced a
100-per-cent guarantee of deposits in the country's six largest banks. Although this
move helped to restore confidence in lrish banks in the short term, it temporarily
destabilized the British banking s)'stem after tens of thousands of savers in the UK
and Ireland transferred their deposits from British-owned to Irish-owned banks to
benefit from the more generous guarantees. Fearful of such beggar-thy-neighbour
policies, several EU member states, including Austria, Denmark, Greece, and Slov-
enia, moved quickly to guarantee bank deposits. Germany's decision to do Iikewise
was especially controversial , coming as it did within hours of a summit at which
the leaders of the four largest EU economies had called on member states to 'ensure
that potential cross-border effects of national decisions are taken into consideration'
(European G8 members 2008).
In spite of these limitations, the EU showed a surprising capacity for coordination in
relation to other aspects of financial crisis management. In October 2008, the heads of
state and government of the euro area invited the UK Prime Minister, Gordon Brown,
to an emergency summit to agree a rescue plan for EU banks. Under this plan, which
was later endorsed by the full European Counci!, member states agreed to recapitalize
and, if necessary. take shares in European banks. Although in summer 2009 it is too
early to tell whether the EUs bank baii-out plan will work as intended, it was widely
praised at the time of its launch as an innovative and decisive policy response. The
plan also emboldened the EUs efforts to find a global solution to the financial crisis.
Within days of the European Council, Nicolas Sarkozy and]ose Manuel Barroso flew
to Camp David to meet with US President George Bush to agree plans for a series of
international summits on the furure of the global financial architecture.
The EU was less sure-footed in its initial response to the real-economy effects of
the global financial turmoil. The European Recovery Plan, adopted at the European
Counci! in December 2008, committed the EU and its member states to an immedi-
ate budgetary stimulus equivalent to 1.5 per cent of EU GDP. Although the European
Recovery Plan broke new ground in some respects (it is the first joint attempt by EU
member states to stimulate aggregate demand) it fell short in others (the proposed
fiscal stimulus is small when compared to the efforts of otheI countries, such as
the United States, and it makes littl e attempt to share the burden of fiscal adj ust-
ment among member states) . A source of significant political tension in this regard
was Germany's reluctance to consider significant tax cuts and expenditure increases.
Although such reluctance is understandable in view of Germany's efforts to reduce
government borrowing following the breakdown of the original SGP, it left the euro
a r e a ' s l a r g e s t e c o n o m y o p e n t o a c c u s a t i o n s o f f i s c a l f r e e - r i d i n g o n l h e r e c o v e r y p r o -
g r a m m e s o f o t h e r s c o u n t r i e s . A n o p e n q u e s t i o n a t t h i s j u n c t u r e c o n c e r n s t h e f a t e o f
l h e r e v i s e d S G P . T o d a t e , m e m b e r s t a t e s h a v e s t o o d b y t h e M a r c h 2 0 0 5 r e f o r m , b U L
t h e f l e x i b i l i t y o f t h e n e w - l o o k S G P w i l l b e s t r e t c h e d t o i t s l i m i t a s b u d g e t d e f i c i t s r i s e
s h a r p l y i n r e s p o n s e t o w o r s e n i n g e c o n o m i c c o n d i t i o n s .
I n t h e m o n e t a r y s p h e r e , t h e E C B m o v e d q u i c k l y i n A u g u s t 2 6 0 7 t o i n j e c t l i q u i d i t y
i n t o m o n e t a r y m a r k e t s . T h i s w a s f o l l o w e d i n O c t o b e r 2 0 0 8 b y t h e f i r s t i n a s e r i e s o f
i n t e r e s t - r a t e c u t s t h a t t o o k t h e E C B ' s b a s e r a t e t o 1 % , i t s l o w e s t e v e r l e v e l . T h e E C B a l s o
u n d e r t o o k u n c o n v e n t i o n a l m o n e t a r y p o l i c i e s , i n c l u d i n g a s c h e m e l a u n d e r i n J u n e 2 0 0 9
t o p u r c h a s e 6 0 b i l l i o n w o r t h o f c o v e r e d b o n d s ( d e b t s e c u r i t i e s b a c k e d b y m o r t g a g e s
o r p u b l i c s e c t o r l o a n s ) . T i m e w i l l t e U w h e t h e r t h e E C B ' s m o n e t a r y p o l i c i e s d u r i n g t h e
g l o b a l f i n a n c i a l c r i s i s w e r e a p p r o p r i a t e b u t t h i s j u d g e m e n t i s s u r e t o h a v e a s i g n i f i c a n t
i m p a c t o n t h e c r e d i b i l i t y a n d r e p u t a t i o n o f t h i s f l e d g l i n g m o n e t a r y a u t h o r i t y
T h e g l o b a l f i n a n c i a l t u r m o i l i s l i k e l y t o s e r v e a s a c a t a l y s t f o r c h a n g e i n t h e a r e a
o f E U f i n a n c i a l - m a r k e t p o l i c y . I n M a r c h 2 0 0 9 , a h i g h - l e v e l g r o u p c o n v e n e d b y t h e
E u r o p e a n C o m m i s s i o n a n d l e d b y J a c q u e s d e L a r o s i e r e , a f o r m e r M a n a g i n g D i r e c t o r
o f t h e I M F , c a l l e d f o r a r a d i c a l o v e r h a u l o f t h e E U ' s f i n a n c i a l a r c h i t e c t u r e . T h e C o m -
m i s s i o n , a n d l a t e r E c o f i n , e n d o r s e d t h e t h r u s t o f t h e s e r e c o m m e n d a t i o n s , a g r e e i n g
i n t e l ' a l i a t o c r e a t e a E u r o p e a n S y s t e m i c R i s k B o a r d ( E S R B ) t o o v e r s e ' e f i n a n c i a l s t a b i l -
i t y i n t h e E U a s a w h o l e . T h e w o r k o f t h e E S R B w i l l b e o v e r s e e n b y a G e n e r a l B o a r d ,
w h i c h w i l l i n c l u d e t h e N C B g o v e r n o r s o f t h e 2 7 m e m b e r s t a t e s a n d t h e P r e s i d e n t a n d
V i c e P r e s i d e n t o f t h e E C B . A l t h o u g h t h e f i v e d e t a i l s o f t h i s r e f o r m i s t o b e w o r k e d
o u t , t h e E U s i n v o l v e m e n t i n f i n a n c i a l - m a r k e t s u p e r v i s i o n i s l i k e l y t o i n c r e a s e i n t h e
c o m i n g y e a r s .
I t i s p r e m a t u r e i n m i d - 2 0 0 9 t o a s s e s s t h e l o n g - t e r m i m p a c t o f t h e g l o b a l f i n a n c i a l
t u r m o i l o n E M U . O n t h e o n e h a n d , a p r o l o n g e d p e r i o d o f e c o n o m i c u n d e r p e r f o r m -
a n c e b y t h e e u r o a r e a c o u l d d a m a g e t h e p r o j e c t ' s c r e d i b i l i t y a n d f u e l p o l i t i c a l t e n s i o n s
b e t w e e n e u r o - a r e a m e m b e r s . O n t h e o t h e r h a n d , a h e i g h t e n e d p e r i o d o f i n s t a b i l i t y
i n t h e g l o b a l e c o n o m y c o u l d i n c r e a s e t h e a t t r a c t i v e n e s s o f E M U a s a n e c o n o m i c a n d
f i n a n c i a l s a f e h a v e n a m o n g E U m e m b e r s t a t e s t h a t h a v e n o t y e t j o i n e d t h e e u r o a n d
a m o n g E u r o p e a n c o u n t r i e s t h a t h a v e n o t y e t j o i n e d t h e E U , s u c h a s I c e l a n d .
C o n c l u s i o n s
T h e t r a d i t i o n a l C o m m u n i t y m e t h o d , a s a r g u e d i n C h a p t e r 4 , h a s w a n e d a s E U
m e m b e r s t a t e s h a v e s o u g h t a l t e r n a t i v e s t o c e n t r a l i z e d a n d h i e r a r c h i c a l m o d e s
o f p o l i c y - m a k i n g . N o w h e r e i s t h i s m o r e e v i d e n t t h a n i n r e l a t i o n t o E M U , w h e r e
m e m b e r s t a t e s h a v e d e l e g a t e d m o n e t a r y p o l i c y t o a n e w t y p e o f C o m m u n i t y i n s t i -
t u t i o n , t h e E C B , a n d p i o n e e r e d t h e u s e o f p o l i c y c o o r d i n a t i o n i n t h e a r e a o f f i s c a l
p o l i c y a n d s t r u c t u r a l r e f o r m . T h i s c h a p t e r h a s t a k e n s t o c k o f t h i s e x p e r i m e n t a f t e r
a d e c a d e o f E M U .
. . .
I n t h e m o n e t a r y d o m a i n , t h e E C B ' s g e n e r a l l y i m p r e s s i v e b u t o c c a s i o n a l l y i d i o s y n -
c r a t i c p e r f o r m a n c e a s a c e n t r a l b a n k s h o w s t h a t a u t o n o m o u s o p e r a t i n g a g e n c i e s c a n
m a k e a n i m p o r t a n t c o n t r i b u t i o n t o E U p o l i c y - m a k i n g . H o w e v e r , c o n c e m s t h a t s u c h
a g e n c i e s c o u l d f r a g m e n t t h e E U ' s i n s t i t u t i o n a l s t r u c t u r e s a r e r e f l e c t e d i n t h e E C B ' s
o c c a s i o n a l l y s t r a i n e d r e l a t i o n s h i p w i t h t h e E U ' s l e g a l o r d e r . I n t h e e c o n o m i c d o m a i n ,
E M U ' s e x p e r i m e n t w i t h p o l i c y c o o r d i n a t i o n c o n t i n u e s , w i t h M a r c h 2 0 0 5 r e f o r m s
' s o f t e n i n g ' r a t h e r t h a n ' h a r d e n i n g ' t h e S G P a n d t h e L i s b o n S t r a t e g y T h e E u r o g r o u p i s
s l o w l y m o v i n g i n t h e o p p o s i t e d i r e c t i o n o f t r a v e l , h a v i n g e m e r g e d f r o m t h e s h a d o w s
o f E c o f i n t o b e c o m e a n i n f l u e n t i a l a n d i n c r e a s i n g l y f o r m a l i z e d i n s t i t u t i o n . I n t h e
e x t e r n a ] d o m a i n , e u r o - a r e a m e m b e r s h a v e a g r e e d t o s p e a k w i t h o n e v o i c e b u t t h e i r
r e p r e s e n t a t i o n i n f i n a n c i a l i n s t i t u t i o n s a n d f o r u m s r e m a i n s f r a g m e n t e d .
L o o k i n g t o t h e f u t u r e , T o L i s o f l i m i t e d r e l e v a n c e f o r E M U a s i t w i U i n t r o d u c e
o n l y m i n o r c h a n g e s i n t h e m a c r o e c o n o m i c d o m a i n . A m o r e s e r i o u s c o n c e r n r e l a t e s
t o t h e g l o b a l f i n a n c i a l t u r m o i l t r i g g e r e d b y t h e c o l l a p s e o f t h e U S s u b - p r i m e - l o a n
m a r k e t i n 2 0 0 7 . T h e a f t e r - e f f e c t s o f t h i s s h o c k i n t h e g l o b a l f i n a n c i a l s y s t e m a n d i n
t h e r e a l e c o n o m y p r o v i d e d t h e s t e r n e s t t e s t t o d a t e o f E M U ' s s y s t e m o f m o n e t a r y a n d
e c o n o m i c p o l i c y - m a k i n g .
N o t e
T h a n k s r o D e b o r a h M a b b e t t , I v o M a e s , l m e l d a M a h e r , H e l e n W a l l a c e , M a r k P o l l a c k , a n d
A l a s d a i r Y o u n g f o r h e l p f u l c o m m e n t s o n a d r a f t o f t h i s c h a p t e r . T h e u s u a l d i s c l a i m e r
a p p l i e s .
. < a l i
, I ! P M J
F U R T H E R R E A D I N G
F o r a n i n t r o d u c t i o n t o t h e e c o n o m i e s o f E M U , s e e D e G r a u w e ( 2 0 0 7 ) . D y s o n a n d
F e a t h e r s t o n e ( 1 9 9 9 ) , M o r a v c s i k ( 1 9 9 8 ) , M c N a m a r a ( 1 9 9 8 ) , a n d J o n e s ( 2 0 0 2 ) e x p l o r e
t h e p O l i t i c a l d y n a m i c s u n d e r p i n n i n g E M U ' s c r e a t i o n . S c h e l k l e ( 2 0 0 6 ) r e v i s i t s s o m e o f t h e
s e m i n a l c o n t r i b u t i o n s t o t h e d e b a t e o n e u r o c a r e a g o v e r n a n c e . D y s o n ( 2 0 0 6 ) e x p l o r e s t h e
e n l a r g e m e n t o f t h e e u r o a r e a . H o d s o n a n d Q u a g l i a ( 2 0 0 9 ) c o n s i d e r t h e i m p a c t o f t h e g l o -
b a l f i n a n c i a l c r i s i s o n E M U a n d t h e E U .
D e G r a u w e , P ( 2 0 0 7 ) , T h e E c o n o m i c s o f M o n e t a r y U n i o n , 7 t h e d n . ( O x f o r d : O x f o r d
U n i v e r s i t y P r e s s ) .
D y s o n , K . ( 2 0 0 6 ) ( e d . ) , E n ! a r g i n g t h e E u r o A r e a : E x t e r n a ! E m p o w e r m e n t a n d D o m e s t i c
T r a n s f o r m a t i o n i n E a s t C e n t r a l E u r o p e ( O x f o r d : O x f o r d U n i v e r s i t y P r e s s ) .
D y s o n , K . , a n d F e a t h e r s t o n e , K . ( 1 9 9 9 ) , T h e R o a d . t o M a a s t r i c h t : N e g o t i a t i n g
E c o n o m i c a n d M o n e t a r y U n i o n ( O x f o r d : O x f o r d U n i v e r s i t y P r e s s ) .
: . - - . - . - - - - - - . . " ' - , . . . . . - . - . . . . . . . _ _ . . . " . . _ _ , . _ _ . " . , . . _ . . .

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CHAPTER 7

Economic and Monetary

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