Monetary Integration in Europe : The European Monetary Union after the Financial Crisis

253 Pages·2017·2.8 MB·English

by  Tomann

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MONETARY
INTEGRATION IN
EUROPE
The European Monetary Union
after the Financial Crisis
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Horst Tomann
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STUDIES IN ECONOMIC TRANSITION
General Editors: Jens Hölscher and Horst Tomann
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Studies in Economic Transition
Series editors
Jens Hölscher
The Business School
Bournemouth University
Bournemouth, East Sussex
United Kingdom
Horst Tomann
Department of Economics
Freie Universitaet (FU) Berlin
Berlin, Germany
This series brings together theoretical and empirical studies on the trans-
formation of economic systems and their economic development. The
transition from planned to market economies is one of the main areas of
applied theory because in this field the most dramatic examples of change
and economic dynamics can be found. It is aimed to contribute to the
understanding of specific major economic changes as well as to advance
the theory of economic development. The implications of economic pol-
icy will be a major point of focus.
More information about this series at
http://www.springer.com/series/14147
Horst Tomann
Monetary
Integration in
Europe
The European Monetary Union after
the Financial Crisis
Horst Tomann
Department of Economics
Freie Universitaet (FU) Berlin
Berlin, Germany
Studies in Economic Transition
ISBN 978-3-319-59246-6 ISBN 978-3-319-59247-3 (eBook)
DOI 10.1007/978-3-319-59247-3
Library of Congress Control Number: 2017947700
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Dedicated to my family’s youngest generation,
Moritz, Bennet, Matteo, Chiara, Lukas and Johannes,
Who hopefully will live in a peaceful Europe
Preface
This book is addressed to students of economics and political science who
attend master programmes with a focus on issues of European integra-
tion. It depicts the European Economic and Monetary Union against the
historical background of different monetary regimes and pays special
attention to the economic debate which accompanied the evolution of
this currency area. The debate is still going on as to whether the Economic
and Monetary Union (EMU) can survive as an institution providing the
highest degree of monetary integration, which is a single monetary policy
for a group of member countries with divergent economic performance.
The analysis of this question points at the need for new forms of eco-
nomic policy coordination. So, the book explores particularly the prob-
lems of policy coordination that arise within a monetary union.
The book grew slowly. For the first time I presented its basic ideas in
1997 when I followed an invitation by Jens Hölscher, then Economics
Director of the Institute for German Studies at the University of
Birmingham. At the time it was fashionable in mainstream economics to
take a critical view of European monetary integration and to judge this
formidable project as being a ‘bad idea’. From the very beginning I mis-
trusted those views which in my understanding were developed out of a
misperception of Mundell’s theory of optimum currency areas. It was
Tim Farmiloe, of Macmillan, who encouraged me to write a book on
these issues.
vii
viii Preface
Since then, I had the opportunity to develop and test my ideas giving
courses and seminars in the master programmes ‘Money, Banking,
Finance’ and ‘International Money’ at the Economics Department of the
University of Birmingham and in the Berlin universities’ joint interdisci-
plinary postgraduate programme ‘European Studies’. During these years,
as the EMU actually evolved, I found my basic ideas confirmed by a more
differentiated debate. Eventually, I had the opportunity to write down
what I had taught during a sabbatical in summer 2005 which I spent at
the Economics Department of the University of Trento. I enjoyed very
much this university’s agreeable and comfortable environment.
When the book’s first edition was printed in 2007, the financial crisis
loomed in US mortgage markets. Ever since then I have pursued its traces
and its impact on the European monetary union. It was clear that the
financial crisis would provide a test for the book’s theses. So, I took the
opportunity to discuss the consequences of the crisis in seminars at the
universities of Birmingham and Berlin and at occasional conferences. I
profited greatly from discussions at EACES conferences in Tartu and at
Tilton House (Sussex) and at Jean Monnet conferences in Wroclaw, Brno,
Bologna, Firenze and Siena. Accordingly, the second edition of the book
not only provides an update to the first edition but is also an extension
comprising new theoretical concepts and discussing policy options of cri-
sis resolution.
I am grateful for valuable comments I received at those conferences
and, in particular, for the intriguing and stimulating curiosity I experi-
enced with the fellows of the Berlin master programme ‘European
Studies’. Last but not least, I am grateful to Karin, my wife, for tolerating
my preoccupation with this book.
Berlin Horst Tomann
March 2017
Contents
1 The History of Monetary Integration in Europe 1
1.1 Th e European Payments Union (EPU), 1950–58 3
1.2 Th e Bretton Woods System, 1944–71 6
1.3 A Currency System of ‘No Commitments’, Since 1973 9
1.4 Th e European Monetary System (EMS), 1979–98 12
Further Reading 17
Part I The Functioning of the Monetary Union 19
2 Theory of Optimum Currency Areas 21
2.1 Wage Rigidity and Money Illusion 24
2.2 Th e Credibility of a Common Currency 28
Conclusion 29
2.3 E ffects of Collusion in the Labour Market 30
Further Reading 35
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x Contents
3 The Economic and Monetary Union: Institutions
and Credibility 37
3.1 Th e New Money Constitution 38
3.2 Independence, Accountability and Transparency 44
Independence 45
Accountability 47
Transparency 48
3.3 Th e EMU as a Regime of Low Inflation 49
Further Reading 53
4 C onventional Monetary Policy of the ECB 55
4.1 H ow Monetary Policy Affects Expenditures and Prices
(Transmission Process) 55
4.2 C oncepts of Conventional Monetary Policy 62
Economic Analysis 67
Monetary Analysis 68
4.3 Th e Performance of the Eurosystem 69
Evaluation 77
Further Reading 79
5 Fiscal Policy Coordination and the Stability and 
Growth Pact 81
5.1 H ow Fiscal Policy Affects Aggregate Demand 82
5.2 I s there a Need to Coordinate National Fiscal Policies? 85
5.3 Th e Stability and Growth Pact 87
5.4 F iscal Policies in the EMU 92
5.5 Assessment 97
5.6 C onclusion 102
Further Reading 104
6 The EMU and the Wage Bargain 105
6.1 H ow the Wage Bargain Affects Employment and 
Real Wages 107
6.2 Th e Case for a European Wage Standard 115