Structural Challenges for Europe
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Structural Challenges for Europe

Edited by Gertrude Tumpel-Gugerell and Peter Mooslechner

The main thrust of the book is that the sharing of mutual experiences is important for generating an acceptable policy mix, both at EU and national levels. The contributors highlight key financial issues, including the role of FDI and of foreign banks in the still ‘under-banked’ acceding countries, the re-launch of social security systems and the fiscal challenges of financing the catch-up process. They also examine the ongoing EU debate surrounding the application of the Stability and Growth Pact in Central and Eastern European Countries (CEECs) and go on to explore the contrasting evidence that some CEECs have shown more extensive privatisation efforts than some EU countries.
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Chapter 24: An adequate macroeconomic policy mix in EMU?

Torben M. Andersen

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24. An adequate macroeconomic policy mix in EMU? Torben M. Andersen 1. INTRODUCTION A key question for the performance of Economic and Monetary Union (EMU) is whether the chosen set-up provides sufficient leverage to pursue adequate macroeconomic stabilization policies. This issue is particularly important given the macroeconomic assignment – the Maastricht assignment – established for EMU. This has two important parts. First, monetary policy has been delegated to the European Central Bank (ECB), while fiscal policy remains a national issue and thus decentralized. Second, the ECB has been given the express overriding mandate to maintain price stability. This is here interpreted in the sense that the main objective of ECB is to target inflation (cf. also ECB 1999). Would the mix of a centralized monetary policy and decentralized fiscal policies leave a problem of coordination of macroeconomic policies, and does the assignment of objectives imply that there will be a systematic stabilization deficit? Substantial coordination problems may arise if fiscal policy decisions can be taken after monetary policy decisions, see, for example Dixit (2000), Dixit and Lambertini (2000a, b), Beetsma and Bovenberg (1998, 1999), Beetsma et al. (2001) and Leitemo (2000). In this case fiscal policy decisions may unravel monetary commitments, and fiscal authorities gain a strategic advantage vis-à-vis monetary authorities. Two arguments can be advanced why these problems would not arise in EMU. First, monetary policy decisions can be taken and implemented more quickly than fiscal policy decisions, which implies that monetary policy actually responds to fiscal...

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