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EMU and Economic Policy in Europe

EMU and Economic Policy in Europe

The Challenge of the Early Years

Edited by Marco Buti and André Sapir

EMU is a completely new policy regime which has significant economic implications and which, it is hoped, will ultimately enhance the role of Europe on the world stage. EMU and Economic Policy in Europe takes stock of the initial experiences of EMU and assesses the challenges which will have to be addressed in the early years of its existence to ensure its long-term objectives are successfully achieved.

Chapter 7: The Functioning of Economic Policy Coordination

Jürgen von Hagen and Susanne Mundschenk

Subjects: economics and finance, financial economics and regulation


Jürgen von Hagen and Susanne Mundschenk 1. INTRODUCTION The beginning of Stage III of Economic and Monetary Union (EMU for short) has brought a qualitative change in the framework for economic policy making in the Member States. The combination of the single currency and the single market creates a unified economic area in which national borders increasingly lose importance for the economic decisions of suppliers and consumers. At the same time, however, large parts of economic policy remain the domain of national or subnational policies. The increasing discrepancy between the European organization of private economic decisions and the national orientation of those parts of economic policy that are not directly regulated by the rules of EMU and the single market is the next, important challenge for the development of economic integration in Europe. The key question is how national economic policies should be coordinated among themselves and with the single monetary policy of the ECB. Economists have analysed this issue from two perspectives. The first takes the organization of economic policies at the national level as given and asks how much coordination of these national policies is necessary.1 Coordination is interpreted as a process of (formal or informal) agreement among independent, national actors. From this perspective, coordination is the exception to the rule. Economic analysis of this process identifies conditions that justify the exception, focusing on the existence and magnitude of international ‘spillovers’ or policy externalities. The alternative perspective takes the common economic area as the starting...

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