The Demise and Reform of the European Union’s Stability and Growth Pact
Edited by Lelia Simona Talani and Bernard Casey
Chapter 3: A Dead Stability and Growth Pact and a Strong Euro: There Must be a Mistake!
Leila Simona Talani INTRODUCTION In November 2003, the Stability and Growth Pact died at the hands of its father and mother, Germany and France.1 Yet, contrary to all expectations the Euro did not plunge. Indeed, it remained stronger than ever and the markets did not even think about speculating on the lack of credibility of a post-SGP EMU.2 Here a fundamental paradox arises: how can a currency strengthen in the midst of a serious crisis of ﬁscal rule? This counterintuitive phenomenon raises a set of fundamental questions concerning the European macroeconomic regime after the establishment of EMU. On what is the credibility of exchange rate commitments grounded? What kind of considerations induce ﬁnancial markets to keep or withdraw conﬁdence in a currency? Is ﬁscal stability in any way related to exchange rate credibility? In political science there is considerable disagreement among various interpretations of these events, ranging from intergovernmentalism to neoconstructivism.3 At the same time, economists continue to dominate the debate about both the credibility of exchange rates and ﬁscal coordination in a monetary union.4 This chapter seeks to explain the paradox within the framework of a revised, ‘embedded’ version of intergovernmentalism based on Andrew Moravcsik’s liberal intergovernmentalism (Moravcsik, 1993a). Intergovernmentalists would predict that, as applied to the working of the SGP, the interests of the most powerful member states prevail over those of smaller states in the ECOFIN decision-making process. Embedded intergovernmentalism traces the interests of the most powerful Euro-zone member states in the macroeconomic preferences of their...
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