The Demise and Reform of the European Union’s Stability and Growth Pact
Edited by Lelia Simona Talani and Bernard Casey
Chapter 1: Interests or Expectations? A Political Economy Model of the Credibility of Exchange Rate Agreements
Leila Simona Talani and Giorgio Fazio The notion of the credibility of international economic agreements has acquired in recent times a very important role in trying to understand why some economic regimes fail and others are successful. The notion of credibility itself is very vague and can only be applied through further speciﬁcation of its main components and its realm of application. In this chapter the authors will identify the sources of credibility of exchange rate commitments by elaborating a political economy model synthesizing the political scientists’ approaches to the credibility of international economic agreements and economists’ approaches to the credibility of exchange rates. In turn, the theoretical considerations stemming from this analysis represent the basis for understanding why the EMU project is credible despite the substantial reform of the European ﬁscal rule and why the crisis of the Stability and Growth Pact (SGP) did not eventually trigger a crisis for the Euro. Indeed, the authors of this chapter believe that the issue of the credibility of the Euro cannot be separated from considerations relating to the existence of a structural, political economy consensus to the Economic and Monetary Union by the most relevant domestic socio-economic actors in the most powerful Euro-zone member states. Therefore the monetary policy of the ECB, the Euro and the whole EMU project did not lose credibility with the breach of the SGP by Germany and France because this did not signal to the markets any lack of consensus to the macroeconomic policies enshrined...
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