Macroeconomic Stabilization Policies in Europe Under the New Regime of Monetary Union

In Europe, the creation of interregional policy institutions is almost complete in the monetary domain, whereas in the fiscal domain policy institutions are still those inherited from national states albeit strictly constrained by a set of supernational rules. This apparent mismatch between monetary and fiscal institutions originates a hybrid regime that we call "constrained international regime". In this paper, we have sought to assess whether such regime is consistent as regards the objective of macroeconomic stabilisation. In section 2, we take issue with the dominant view that a "monetary giant" surrounded by "fiscal dwarves" offers better guarantee of central bank's independence, monetary stability, fiscal discipline and retrenchment of the public sector. The macroeconomic interregional model presented in section 3 shows that central monetary policy and national fiscal policies cannot be determined one independently from the other. Macroeconomic shocks are generally unevenly distributed across member countries, so that the efficient solution depends on: i) the degree of correlation of shocks across member countries, ii) the nature of structural interdependence among them. In section 4, estimations of the fiscal stances of EU governments in the last thirty years point to the conclusion that the dominant judgement of "fiscal indiscipline" should be substantially mitigated. In section 5, taking existing fiscal legislation as given, it is estimated that "country-by-country" stabilization following local shocks is likely to result in greater dispersion of per-capita incomes in the euro area, rather than reversion to the mean of per-capita incomes across member countries. Therefore, it is suggested that a step towards fiscal centralization should be moved, at least in the form of interregional mutual risk insurance schemes granting each country a chance to receive compensatory transfers whenever per-capita income falls below the EMU average