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Most current European Union Delegation News

by admin on November 15, 2012

Most current European Union Delegation NewsEuropean Union Delegation News

EU Parliamentary Delegation Meets Acting Foreign Minister Berhane
european union delegation news
Ambassador Berhane, Acting Foreign Minister, has met an EU Parliamentary Delegation from new member states of the European Union, from the Czech Republic, Hungary, Poland and Slovakia. Ambassador Berhane told the delegation that Africa was …

European monetary union

European monetary union is an important milestone on the road to unification of Europe. The long and winding road of European integration is accurately described by Siebert and Koop (1993:1) as follows: ‘The road Western Europe took from the end of World War II to its current state has been one with lots of steep and sometimes blind curves, with harsh speed limits and frequent detours. But still it has been one that attracted more and more traffic.’ Siebert and Koop interpret the competition among governments in a fashion similar to Tiebout (1956), i.e. as a market for institutional arrangements. In institutional competition, the national governments strive to find ever better institutional arrangements in order to keep mobile factors at home or to attract them. With the establishment of the European Central Bank (ECB), competition among the participating countries to have the ‘best central bank constitution’ will be over. As specified in the Maastricht Treaty, the primary objective of the ECB is to “maintain price stability.” The published definition of price stability is inflation of below 2 percent, measured as the twelve-month change in the harmonized index of consumer prices. In setting monetary policy, the Governing Council considers incoming information under two “pillars”: the growth in a euro-area monetary aggregate in relation to a published “reference value,” and a mix of other euro-area indicators defined as a “broadly based assessment of the outlook for future price developments.” Among other things, this second pillar includes wages, bond prices, the yield curve, measures of real activity, business and consumer confidence, and the exchange rate. The ECB’s focus in setting monetary policy is on area-wide price developments and activity, and not on developments in individual countries. The Maastricht Treaty grants the ECB frill constitutional independence. It explicitly states that neither the ECB nor any member of its decision-making bodies shall seek or take instructions from European Commission institutions, from any government of any member state, or from any other organization or institution. As is shown not least by the debate on the ECB’s accountability, the new institution will not find it easy to hold its own in a critical environment. Credibility of the European Central Bank assumes particular significance precisely in the case of a new currency and a new central bank. It is an important signal of what monetary policy and what money the public can expect. ‘Institutions reduce uncertainty by constraining human action. Thereby, they enable economic actors to form expectations about the action of others.’ (Streit et al. 1997:688). Will the Statute of the ECB meet these requirements? Credibility and reputation have been developed out of a neo-classical concept of monetary policy-making, based on the natural rate of unemployment and rational expectations (Spahn 1997). Barro and Gordon (1983) argued that central banks are likely to suffer from a credibility problem. This credibility problem stems from the assumed goal of the increase of employment above its natural rate by means of inflationary surprises. Rational private agents anticipate this outcome and react by increasing the expected rate of inflation. The result is an inflationary bias without any effect on employment. However, in a multi-period setting, pre-commitment of monetary policy to adhere to price stability may be possible. If the public is decidedly averse to inflation, it would be difficult to break inflationary expectations after a surprise inflation had been triggered deliberately. This would make the subsequent process of disinflation more costly, and thereby effectively discourage monetary policy-makers from using the means of ‘surprise inflation’ in the first place. Inspired by Rogoff (1985), some have suggested that the credibility problems of optimal monetary policy could be mitigated by the delegation of monetary policy to an independent central bank. The role of the government is then to determine the institutional framework of monetary policy-making with the central bank actually implementing the policy. However, Jensen (1997) has raised the question of why the delegation of monetary policy should be more credible than the implementation of optimal monetary policy itself. He has shown that delegation improves sub-optimal outcomes, but only to the extent that there are important costs of ‘reappointment’. With reappointment costs of delegation, the inflation bias is reduced, but not completely eliminated. The central bank gains credibility if an announced action coincides with the expectation of market agents about this action, e.g. if the targeted money growth rate equals the expected growth rate. Reputation is more similar to capital goods, growing slowly by means of a series of credible actions and eroding quickly if the central bank attempts to deceive the public (Cukierman 1992). As a general principle, credibility facilitates interpersonal relationships. Credibility is capable of substantially reducing transaction costs. Experience shows that those central banks that have a successful track record of stability are most likely to enjoy credibility. Very broadly, such a successful track record is characterised over the long term by low inflation with very little fluctuation. Hardly anyone will expect that the ECB will be able or even want to keep the inflation rate below 2 per cent perpetually and under all circumstances. Additional efforts will therefore be needed to establish credibility convincingly from the outset. This is all the more necessary as, given the high unemployment in most European countries; pressure has been exerted on the ECB right from the start to tone down the priority of price stability in favour of boosting employment. This is the tenor of demands to make a relevant amendment to the Statute. The step towards a common currency in Europe is viewed with scepticism: ‘The shift to a single currency for all of Europe would be an unprecedented event. There is no sizeable country anywhere that does not have its own currency. A national currency is both a symbol of sovereignty and the key to the pursuit of an independent economic and budget policy.’ (Feldstein 1997:3). A special feature of European monetary union is that it will not have a complementary political union, at least in the foreseeable future. The principle of ‘one country, one currency’ runs like a thread throughout monetary history. In EMU, this link is being broken for the first time and replaced by the principle of ‘one market, one money’ (King 1997). From a constitutional perspective, this is certainly an unusual and historically unique event. The legal securing of the ECB’s independence even goes beyond its being enshrined in the national constitutions, as the EU Treaty can be amended only unanimously by all member states. The same applies to the objective of giving priority to monetary stability. Hence, the reappointment costs, i.e. the costs of changing the conditions under which monetary policy operates (Jensen 1997), seem to be very high in EMU. That gives the supranational institution ECB a special standing. It is not for nothing that there are repeated calls for political ‘counterweight’. Yet the necessary co-ordination of economic policy within the EU should not be allowed to become an instrument that undermines the European Central Bank’s independence. Objections to this final and irrevocable ‘abdication by policy-makers’ are surfacing throughout Europe. There is already talk of a future ‘dictatorship’ of the ECB; there are also warnings of ‘centralbankisation’, i.e. that Europe will be shaped in the image of the central bank. However, the priority accorded to stable money is precisely what was agreed in the Maastricht Treaty, and an independent central bank has been given the mandate to keep this promise. Only now do some people seem to be getting the picture that this monetary arrangement has implications for many other policy areas, too. Now, it will inevitably be revealed to what extent all the other areas comply with the conditions set by the objective of ‘stable money’. The euro will have to demonstrate a large measure of stability if it is to contribute successfully towards integrating Europe and not towards dividing it. In the past, various individuals have vowed emphatically that this will indeed be the case. However, public statements in favour of a stable euro hardly constitute a copper-bottomed guarantee on their own. A broad-based public support for the ECB’s clear, stability-oriented policy stance will be a crucial factor. Unlike the Statute of the ECB, the stability culture of which so many speak cannot be established by fiat. This does not mean that the two phenomena are mutually independent. Permanent confidence in the stability of the currency can be instilled only within the context of a well-conceived status and its implications for monetary policy; this is confidence which, in turn, underpins monetary policy measures geared to stability. The Maastricht Treaty has largely laid the foundations for a stabilityoriented monetary policy as far as the institutional arrangements are concerned. The launching of a new central bank and a new currency is accompanied by uncertainty. The financial markets will keep a critical eye on the ECB right from the start. The initial monetary policy course thus takes on crucial importance. Some people are therefore already advising the ECB to pursue a particularly restrictive course right from the outset, so as to nip any mistrust in the bud, as it were. Such an uncompromising approach would inevitably give rise to tensions within the Council. It is also hard to imagine that the ECB would meet with general approval for such a course among the people of Europe, given the high level of unemployment. At the moment, we do not even know whether there is a stable European consensus on the acceptable or optimal rate of inflation. The trend towards the convergence of inflation rates at a low level is a good omen. In a monetary union without a flanking political union, we shall simply have to wait and see whether this convergence of preferences will prove to be a lasting phenomenon. The consensus regarding the preference for stable money—the common ‘stability culture’—is all the more important as monetary union will have to survive for the foreseeable future without the additional support of a political union. For this reason, the public finance convergence criteria are very important. The fiscal criteria have to be met on a sustainable basis; in other words, not just at the beginning of Stage Three. Finally, the member states must implement the labour market reform that is urgently needed and, in general, significantly cut back the dense jungle of over-regulation. Without a far higher degree of flexibility at the microeconomic level, it will not be possible for monetary union to yield the desired benefits, nor will the ECB encounter broad and lasting acceptance for a monetary policy geared to ensuring price stability in accordance with the Maastricht Treaty. In an overall favourable assessment of the EMU Project, the IMF critically remarks that ‘the failure to recognise explicitly the importance of flexible labour markets was an important omission from the Maastricht framework’ (IMF 1997:64). And ‘a failure to address labour market problems would prevent Europe from realising its full growth potential, and could also weaken the credibility of the euro if financial markets perceive that persistent unemployment is eroding support for prudent macroeconomic policies’ (IMF 1997:68). In a simulation using its multi-country econometric model (MULTIMOD), the IMF, in one scenario, illustrates the implications of lagging structural reforms. In this scenario, real wage flexibility remains low, the natural rate of unemployment gradually increases to the level of actual unemployment in the EU, and national governments attempt to offset the effects of deteriorating labour market conditions on output and employment by additional government spending. With inflexible labour markets and rising structural unemployment, the price level is estimated to increase by 2.3 per cent over the medium term, and the level of real GDP declines by 2.5 per cent relative to the baseline. The government debt-to-GDP ratio rises by more than 10 percentage points. This worsening of economic performance raises the risk premium on eurodenominated assets by 40 basis points in the simulation. The meaningfulness of such approaches is debatable. However, at any rate, this simulation does make clear the magnitude of negative trends that are to be expected if the necessary reforms are not implemented. It is not possible to identify the psychological damage and the political repercussions in this manner, anyway. The Maastricht Treaty has provided the blueprint for a strong ECB, able to act independently as a credible guardian of a stable euro. Still, the importance of legal independence may have been overstated. Not even an independent central bank can lastingly defend monetary stability against a ‘society of excessive demands’. In other words, every society ultimately gets the rate of inflation it deserves and basically wants. Of course, this statement does not mean that institutions are irrelevant or that central bank independence is unimportant. Precisely the contrary holds true: in principle, resistance to making the central bank an independent institution with the single goal of price stability always reflects the intention of reserving access to influencing monetary policy whenever a currency loses value. Governments seeking re-election often have an incentive to achieve short-term benefits through inflation without considering its long-term costs. In view of the temptations inherent in the political process, a society can signal its determination to safeguard the stability of its money only by choosing the appropriate institutional arrangement. In this context, the independence of the central bank is a necessary, but not sufficient, condition. Following our analysis of ECB, we can raise the issue of independence of the Bank of England. It is important to recognize whether an independent Bank of England can offer a panacea for the UK economy’s shortcomings. Such a policy arrangement does not imply that policymakers either in the Bank or the Treasury could be indifferent to the monetary stance in the rest of Europe. So if such an institutional change is to be contemplated, it is crucial to be able to identify the circumstances under which delegation of policy would be beneficial. Let’s concentrate on two aspects influencing the decision to delegate sovereignty to an independent Bank of England; the objectives of the Bank and its pre-commitment capability compared to the government itself. Introducing fiscal policy brings a new complication. Assume that the government retains control of fiscal policy and has a well defined objective function. Appointing an independent central banker increases the number of decision makers from one to two. Now, there is scope for the monetary and fiscal authorities to act either cooperatively or noncooperatively (Mankiw, 1990, p.1646). When acting cooperatively they minimise a weighted average of their respective objective functions. Noncooperatively they act to minimise their cost functions separately. Of course, the question to be addressed in choosing whether to delegate the instruments of monetary policy remains whether welfare is higher on the grounds of the government’s own criteria, not on the basis of any weighted average cost function. Economic grounds for delegation of monetary policy to the Bank of England may be rather weak, and indicate instead that a unified approach to fiscal and monetary policy is more likely to achieve the government’s objectives. This tends to contradict some of the more simplistic propositions which have been associated with the arguments for an independent Bank of England. To take the most common example, it has been suggested that an independent monetary authority should be charged with the sole objective of achieving zero inflation. More generally, the question of whether and under what conditions the Bank should be granted independence depends on a number of distinct theoretical concepts which are often confused in popular discussion. For example, it has often been claimed that the ‘credibility’ of monetary policy would be enhanced by an independent central bank. Yet the precise meaning of credibility in this context is ambiguous. Thus, it is unlikely to be sensible to appoint a monetary authority with an ability to make credible policy commitments if at the same time it is following objectives which differ markedly from those of the government itself. Produced by ProfEssays ( www.professays.com ) – professional custom essay writing service: custom essays, custom term papers, custom academic papers, custom research papers, compositions, book reports, case study. No plagiarism, high quality, prompt delivery.

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