EMU and the policy convergence hypothesis25 September, 2012 at 11:04 | Posted in Economics, Politics & Society | Leave a comment
These data suggest that while there is evidence of euro area convergence in terms of long-term interest rates and the real exchange rate (which would be expected given the common currency and regional short-term interest rate), there is surprisingly little evidence of euro area policy convergence in terms of economic growth, employment, and inflation. Helping to explain the lack of economic convergence in terms of these primary policy outcomes, the data also show relatively little euro area convergence, even increased divergence, in terms of government spending, a primary fiscal policy instrument.
In short, a common regional monetary policy has not been sufficient to produce convergence in terms of the most politically important macroeconomic policy outcomes (e.g. growth, employment, and inflation) when there remains divergence among EMU member states in terms of their fiscal policies. Indeed, given the European Union’s (EU’s) inability to enforce the terms of its Stability and Growth Pact (SGP) and varying national preferences for fiscal policy expansion, economic policy divergence seems likely to persist, even expand as more (and less developed) national economies enter into the euro area …
To conclude, what have political scientists learned after ten years of experience with a common currency and monetary policy in Western Europe? Despite all the optimism associated with regional policy convergence during a period of favorable economic conditions in the late 1990s, we have learned that economic policy convergence among the euro area countries has not continued after 1999 and may have even reversed in certain dimensions. For policymakers, the lack of policy convergence means that European monetary union rests on a fragile foundation; indeed, this foundation will likely become even more problematic as the EU’s new less developed national economies formally enter into the euro area. For IPE scholars, the lack of EMU policy convergence means that convergence theory has not demonstrated much validity even in its most favorable empirical domain. Although it may still be too early to declare it as dead, the convergence hypothesis appears to be on life support. Perhaps in another ten years, IPE scholars will have sufficient empirical evidence to make a final judgment as to its empirical validity.
David Bearce Journal of European Public Policy