Adjusting to EMU

363 Pages·2006·2.006 MB·English

by  Brian Ardy, Iain Begg, Dermot Hodson PhD, Imelda Maher, David G. Mayes (auth.)

One Europe or Several?
Series Editor: Helen Wallace
The One Europe or Several? series examines contemporary processes of political, security,
economic, social and cultural change across the European continent, as well as issues of convergence/
divergence and prospects for integration and fragmentation. Many of the books in the series are
cross-country comparisons; others evaluate the European institutions, in particular the European
Union and NATO, in the context of eastern enlargement.
Titles include:
Brian Ardy, Iain Begg, Dermot Hodson, Imelda Maher and David G. Mayes
ADJUSTING TO EMU
Sarah Birch
ELECTORAL SYSTEMS AND POLITICAL TRANSFORMATION IN POST-COMMUNIST EUROPE
Sarah Birch, Frances Millard, Marina Popescu and Kieran Williams
EMBODYING DEMOCRACY
Electoral System Design in Post-Communist Europe
Andrew Cottey, Timothy Edmunds and Anthony Forster (editors)
DEMOCRATIC CONTROL OF THE MILITARY IN POSTCOMMUNIST EUROPE
Guarding the Guards
Anthony Forster, Timothy Edmunds and Andrew Cottey (editors)
THE CHALLENGE OF MILITARY REFORM IN POSTCOMMUNIST EUROPE
Building Professional Armed Forces
Anthony Forster, Timothy Edmunds and Andrew Cottey (editors)
SOLDIERS AND SOCIETIES IN POSTCOMMUNIST EUROPE
Legitimacy and Change
Karen Henderson (editor)
THE AREA OF FREEDOM, SECURITY AND JUSTICE IN THE ENLARGED EUROPE
James Hughes, Gwendolyn Sasse and Claire Gordon
EUROPEANIZATION AND REGIONALIZATION IN THE EU’S ENLARGEMENT TO CENTRAL AND
EASTERN EUROPE
The Myth of Conditionality
Andrew Jordan
THE EUROPEANIZATION OF BRITISH ENVIRONMENTAL POLICY
A Departmental Perspective
Christopher Lord
A DEMOCRACTIC AUDIT OF THE EUROPEAN UNION
Valsamis Mitsilegas, Jorg Monar and Wyn Rees
THE EUROPEAN UNION AND INTERNAL SECURITY
Guardian of the People?
Helen Wallace (editor)
INTERLOCKING DIMENSIONS OF EUROPEAN INTEGRATION
One Europe or Several?
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Also by David G. Mayes
WHO PAYS FOR BANK INSOLVENCY? (with A. Liuksila)
IMPROVING BANKING SUPERVISION (with L. Halme and A. Liuksila)
PUBLIC INTEREST AND MARKET PRESSURES (with W. Hager, A. Knight and W. Streeck)
MODERN PORTFOLIO THEORY AND FINANCIAL INSTITUTIONS (with D.C. Corner)
SOCIAL EXCLUSION IN EUROPEAN WELFARE STATES (with R. Muffels and P. Tsakloglou)
SOCIAL EXCLUSION AND EUROPEAN POLICY (with J. Berghman and R. Salais)
THE EVOLUTION OF THE SINGLE EUROPEAN MARKET
SOURCES OF PRODUCTIVITY GROWTH
THE SINGLE MARKET PROGRAMME AS A STIMULUS TO CHANGE (with P.E. Hart)
INEFFICIENCY IN INDUSTRY (with C. Harris and M. Lansbury)
THE EVOLUTION OF RULES FOR A SINGLE EUROPEAN MARKET (editor)
1. Industry and Finance
2. Rules, Democracy and the Environment
3. Social and International Issues
FOREIGN DIRECT INVESTMENT AND TRANSITION (editor with G. Csaki and G. Foti)
THE EXTERNAL IMPLICATIONS OF EUROPEAN INTEGRATION (with others)
ACHIEVING MONETARY UNION (with A. Britton)
A NEW STRATEGY FOR SOCIAL AND ECONOMIC COHESION AFTER 1992 (with I Begg)
THE EUROPEAN CHALLENGE
A STRATEGY FOR THE ECU (with A. Britton and Ernst & Young)
SHARPBENDERS (with P. Grinyer and P. McKiernan)
INTEGRATION AND EUROPEAN INDUSTRY (with M. Macmillen and P. van Veen)
THE EXCHANGE RATE ENVIRONMENT (with S. Brooks and K. Cuthbertson)
APPLICATIONS OF ECONOMETRICS
THE PROPERTY BOOM
INTRODUCTORY ECONOMIC STATISTICS (with A.C. Mayes)
Also by Iain Begg
INTEGRATION IN AN EXPANDING EUROPE: Reassessing the Fundamentals (edited with Joseph
Weiler and John Peterson)
EMU AND COHESION: Theory and Policy (with Brian Ardy, Waltraud Schelkle and Francisco Torres)
EUROPE, GOVERNMENT AND MONEY: Running EMU – the Challenges of Policy Co-ordination
Paying for Europe (with Nigel Grimwade)
APPLIED ECONOMICS AND PUBLIC POLICY (edited with S.G.B. Henry)
Adjusting to EMU
Brian Ardy
Iain Begg
Dermot Hodson
Imelda Maher
David G. Mayes
The views expressed in this publication are those of the authors and are not
necessarily those of the Bank of Finland, the European Commission or any
other organisations that the authors are currently affiliated with.
© Brian Ardy, Iain Begg, Dermot Hodson, Imelda Maher
and David G. Mayes 2006
Softcover reprint of the hardcover 1st edition 2006 978-0-333-99566-2
All rights reserved. No reproduction, copy or transmission of this
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may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified
as the authors of this work in accordance with the Copyright,
Designs and Patents Act 1988.
First published 2006 by
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ISBN 978-1-349-43260-8 ISBN 978-0-230-55474-0 (eBook)
DOI 10.1057/9780230554740
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Library of Congress Cataloging-in-Publication Data
Adjusting to EMU/Brian Ardy...[etal.].
p. cm. — (One Europe or several?)
Includes bibliographical references and index.
ISBN 978-1-349-43260-8
1. Economic and Monetary Union. 2. European Union. 3. Europe—
Economic integration. 4. European Union countries—Economic
conditions. 5. European Union countries—Economic policy. I. Ardy,
Brian. II. Series.
HC241.A35 2005
332.4′566—dc22 2005051276
10 9 8 7 6 5 4 3 2 1
15 14 13 12 11 10 09 08 07 06
Contents
List of Tables vii
List of Figures ix
List of Boxes xi
Abbreviations xii
Acknowledgements xv
Preface xvi
Notes on Contributors xviii
1 Introduction 1
Part I Adjustment at the EU Level
2 Macroeconomic Policy in EMU 25
3 The EMU Constitution 65
4 Policy Co-ordination under EMU 88
5 Structural Policies as Means of
Adjusting under EMU 116
Part II Adjustment at the National Level
6 The Early Years of EMU: Convergence,
but Uneven Adjustment? 139
7 Germany: Painfully Adjusting to EMU? 168
8 Ireland: Adjusting to Life in the Euro Area
Without the United Kingdom 193
9 Finland: Membership to Encourage Change 207
10 Sweden: Not Now or Not Ever? 225
11 The United Kingdom: Prospering
Outside the Euro Area? 240
v
vi Contents
12 The New Members: Big Bang or Slow
Transition to Stage 3? 265
13 Adjusting to EMU: Conclusions and Policy Implications 287
Notes 306
Bibliography 314
Index 341
List of Tables
1.1 The effects of EMU 11
1.2 Public finance trends: Selected euro area
Member States 13
2.1 Asymmetries in fiscal policy 39
2.2 Thresholds in the role of the public sector 42
2.3a Reaction function estimates 43
2.3b Corridor reaction functions 44
2.4 Phillips curve estimates from panel data 48
2.5 Estimates of the Phillips curve with regional EU data 49
2.6 Estimates of a nonlinear Okun curve 51
2.7 OLS estimation results for the 1987Q1–1997Q4 period 52
2.8 Alternative estimates of the impact of house and stock
market prices with European cross-country panel data 54
5.1 Labour market indicators 118
5.2 Performance on key structural indicators 120
6.1 Compatibility of monetary union with Germany 142
6.2 General government deficits of euro area members 143
6.3 The Council decision on the first wave of euro
area members 144
6.4 Labour market institutions and regulation 147
6.5 Member States subject to the excessive deficit procedure 151
6.6 Harmonised consumer price index: The long-term
picture 152
7.1 Germany and the convergence criteria 1997/98 170
7.2 Hourly labour costs in manufacturing 2002 172
7.3 Germany and euro area economic performance
1991–2005 173
7.4 Annual GDP growth, 1962–2006 173
7.5 German public-sector financing 175
7.6 Structure of the tax wedge in 2001 and
change 1997–2001 182
7.7 Employment protection legislation 182
7.8 Relative productivity and price levels in the
euro area 2002 191
8.1 Forecast error variance decomposition for Ireland 195
8.2 Wage flexibility in the OECD 200
9.1 The change in structure of Finnish trade 1985–2001 212
vii
viii List of Tables
9.2 Bank of Finland forecast, September 2003 224
11.1 Public finances in the euro area and the UK 1990–2003 244
11.2 Variability of the real effective exchange rates (Standard
deviation of the monthly REER) 249
11.3 UK balance of payments current account and share
of world trade 249
11.4 Stability of GDP growth 1974–2001 253
12.1 Maastricht criteria – New members and Mediterranean
countries 271
12.2 Labour costs in the new members and the EU-15 (2000) 273
12.3 Growth of GDP per head and per worker 1994–2003 274
12.4 R&D spending as a percentage of GDP
(average, 1999–2001) 274
12.5 Current account deficits 275
12.6 Estonian government expenditure and
revenue 278
12.7 Estonian nominal interest rates 279
List of Figures
2.1 EU economic indicators 1995–2004 32
2.2 Output gaps in per cent 35
2.3 Effect of the output gap on inflation in the euro area 46
2.4 Persistence in inflation and the output gap in the euro area 47
4.1 Policy co-ordination in the EU 101
5.1 Contributions to EU employment growth 119
6.1 Responsiveness of inflation to positive (y>0)
and negative (y<0) output gaps EU countries 1987–1998 145
6.2 Cumulative growth in GDP, 1999–2006 (forecast), % 149
6.3 Growth since the launch of Stage 3 150
6.4 Euro area growth during stages 1–3 165
6.5 Euro area inflation during stages 1–3 of EMU 166
7.1 Growth in GDP per worker 1974–2002 174
7.2 Nominal interest rates euro area 1990–2002 176
7.3 Real interest rates euro area 1990–2002 177
7.4 EU 15 NAIRU and unemployment 178
7.5 Germany NAIRU and unemployment 179
7.6 West Germany: Phillips Curve
(ILO+hidden unemployment) 180
7.7 West Germany: Phillips Curve (ILO unemployment) 180
7.8 Beveridge curve for the euro area 185
7.9 West Germany: Beveridge curve
(ILO+hidden unemployment) 185
8.1 A measure of coincidence 196
8.2 Net migration, 1992–2003 197
8.3 Inward, outward and net migration in Ireland,
1988–2001 198
8.4 Net outward migration by destination, 1987–2004 199
8.5 Net inward migration by origin, 1987–2004 199
8.6 Net lending in Ireland, 1990–2006 203
9.1 Macroeconomic developments in Finland 1980–2004:
GDP, employment, unemployment and the debt ratio 210
9.2 Macroeconomic developments in Finland 1980–2004:
Public deficit, current account, interest rate
differential, investment 211
9.3 Macroeconomic developments in Finland 1980–2004:
Inflation, wage rate, productivity, exchange rate,
growth of GDP 211
ix