Macroeconomic imbalances in Europe: institutional progress and the challenges that remain

Abstract

The article reviews the key steps in the construction of the Economic and Monetary Union (EMU) and the accompanying debate in the academics and within the European institutions, stressing that most vulnerabilities unveiled by the sovereign debt crisis were known long before the inception of the EMU. But the rules, although later amended, largely neglected the critical implications of macroeconomic imbalances for fiscal and sustainability. As the financial tensions deepened, significant progress has been made in enhancing European economic governance, including the new procedure for macroeconomic imbalance surveillance (EIP). The article argues that preventing and correcting macroeconomic imbalances is now one of the EU’s most challenging tasks as major technical and political difficulties still need to be overcome. The EIP represents a major step forward in strengthening the EU’s capability for managing the risks to macroeconomic stability, largely contributing to a common understanding among Member States and in the EU institutions of methods and tools for dealing with the fundamental macro drivers. The new procedure comes together with a comprehensive strategy of deep fiscal, financial, economic and political reform of the EMU. Further progress requires the will to change at both the domestic and the EU level in order to effectively implement the new procedures and, where necessary, to reinforce their scopes.

Keywords:

• macroeconomic imbalances
• fiscal policy
• European governance
• economic convergence

JEL Classification:

• E24
• F30

Notes

¹ For instance, between 1998 and 2007 bank lending for house purchases increased by more than 400% in Spain, 500% in Ireland and 800% in Greece.

² See Buti and Sapir (1998) and Brunila et al. (2001).

³ See Buti et al. (2003).

⁴ Historically, in the absence of political integration a sustainable common currency area was one in which the partners were strictly interconnected, either because there was one dominant state or because there were well-established commitments suitable for mutual benefits to be seized by all members (Cohen, 1993).

⁵ The redundancy of numerical fiscal targets once an independent central bank is instituted with a specific mandate is also argued by Dornbusch (1997). About the fiscal implications of the EMU, several contributors also stressed that a key ingredient of successful currency union is enlargement of the stabilization action of a central budget, based on the experience that in the United States between 28 and 40 cents of every dollar decline in regional income is offset by federal transfers (Sala-i-Martin and Sachs, 1991; Bayoumi and Masson, 1995).

⁶ The new Excessive Imbalance Procedure (EIP) is defined in detail in EU Regulation 1176/2011.

⁷ Countries under assistance programmes (in 2012, Greece, Ireland, Portugal and Romania) are not examined under the MIP as they are already subject to enhanced economic surveillance.

⁸ ‘Would Zapatero... have really imposed bubble-busting real-estate taxes after receiving a high-level delegation from Brussels or Frankfurt? Of course not’ (Münchau, 2010).

⁹ For classification convenience, the core countries here are Austria, Belgium, France, Germany and the Netherlands; the noncore countries are Greece, Ireland, Italy, Portugal and Spain.

¹⁰ Commission Regulation 93/2013 laying down detailed rules for the implementation of Council Regulation No. 2494/95 concerning HICP, as regards establishing owner-occupied housing price indices.