JBNST - Vol. 239/5-6 - 2019

This comparative study looks at broad economic developments during the 20 years of the European Monetary Union (EMU) and 20 years of the European Monetary System (EMS). We analyze the economic performance by looking at a set of macroeconomic variables. The analysis of macroeconomic performance includes two perspectives: one is internal, i. e. how did the countries perform relative to each other; the other is external, i. e. how did the group of member countries perform vis-à-vis other countries. Overall, the analysis of the two periods suggest that the EMU does not display a macroeconomic development inferior to the EMS period. On the contrary, some crucial macroeconomic indicators point to a greater stability during the EMU period compared to the EMS period.

This article reviews how the European Central Bank (ECB) implemented its monetary policy for the euro area from 1999 to 2018 from two perspectives. Taking a Keynesian point of view, the euro area economy was beset for a long time by secular stagnation and required the ECB to ensure a protracted period of relatively low interest rates to provide continuous support to aggregate demand at the level of the Economic and Monetary Union (EMU). By contrast, the Austrian School of Economics argues that the low-interest rate bias of the ECB caused financial excesses and prevented a more rapid reallocation of unviable resources necessary for a sustainable expansion of aggregate supply. Both the Keynesian and the Austrian paradigm appear relevant when examining the monetary and financial aspects of the euro area business cycle and the secular decline of interest rates over the past 20 years. For most of the time, ECB monetary policy was the ‘only game in town’ and the EMU architecture was unable to deliver the balanced macroeconomic and financial policy mix required for a sustainable path of the euro area economy.

The paper examines the bank lending activities of banks in a low interest rate environment. External financing of small- and medium-sized enterprises in the euro area primarily takes place via bank loans and not through capital markets. Based on the Bankscope database, bank balance sheet data is utilized. Control variables are included, such as for the system of banking regulation. The panel estimation includes 706 banks from 15 Euro area member states and is conducted for the period 2000 to 2015. All models show a significant positive impact of lower interest rates on net lending. In particular, the results do not indicate that credit is restricted if interest rates move towards the zero-lower bound.

This paper reviews how the European Union’s fiscal rules have developed from the Maastricht Treaty that established the single monetary policy up until today. It shows that the design of these rules did not always follow economic logic but often resulted from political constraints, giving rise to some flaws in the framework from its very beginning. At the same time, the repeated attempts to adjust the fiscal framework to a multitude of circumstances over the past 25 years have made it overly complex and incoherent. Based on a finding that euro area countries’ compliance with the EU fiscal rules has been unsatisfactory, the paper concludes that in its current shape the Stability and Growth Pact is an insufficient disciplining device in good economic times, with the consequence that there are no fiscal buffers, in particular in high-debt countries, such that growth can be supported in economic troughs. Based on this finding, the paper reviews reform options for making the fiscal framework more effective in bringing about sounder public finances and avoiding the procyclicality observed over the past two decades.

We study the within-country dimension of financial cycles in the four largest euro area economies using tools from wavelet analysis. We focus on credit and house price cycles which are most commonly used to represent the financial cycle. With the exception of Germany, the variables contain important common cycles within each country close to the upper bound of business cycle length and beyond which can be interpreted as financial cycles. These cycles are closely linked to domestic cycles in real activity showing financial and real economic cycles as interconnected phenomena. For these common cycles, credit and house prices lag real GDP.

When, about twenty years ago, the Euro was created, one objective was to facilitate intra-European trade by reducing transaction costs. Has the Euro delivered? Using sectoral trade data from 1995 to 2014 and applying structural gravity modeling, we conduct an ex post evaluation of the European Monetary Union (EMU). In aggregate data, we find a significant average trade effect for goods of almost 8 percent, but a much smaller effect for services trade. Digging deeper, we detect substantial heterogeneity between sectors, as well as between and within country-pairs. Singling out Germany, and embedding the estimation results into a quantitative general equilibrium model of world trade, we find that EMU has increased real incomes in all EMU countries, albeit at different rates. E. g. incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and Luxembourg, respectively.

This paper analyzes spillovers and the macroeconomic effects of economic policy uncertainty (EPU) in Europe over the last two decades. Drawing on the newspaper-based uncertainty indices by Baker et al. (2016, Measuring Economic Policy Uncertainty. Quarterly Journal of Economics 131 (4): 1593–1636), we first use the Diebold and Yilmaz (2014 On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms. Journal of Econometrics 182 (1): 119–134) connectedness index methodology to investigate the static and dynamic patterns of EPU spillovers. We find substantial spillovers across the European countries. Over time, Germany in particular has become increasingly connected to the other economies. In a second step, we investigate the economic impact of EPU shocks using a structural VAR. The detrimental influence of uncertainty turns out to be regime-dependent. We identify a pre-crisis, a crisis and a post-crisis regime, and the effect is only significant in the former two. Finally, the impact of EPU shocks is also heterogeneous across the monetary union’s most important members.

A lack of structural reforms is often considered as a major problem in many member countries of EMU. This lack is arguably partly due to uncertainty about outcomes and a disregard for how policies spill over to other countries. Monetary union can reinforce this underprovision of structural reforms. Because centralization of structural policies is politically not feasible, I discuss subsidies for reforms and insurance against negative outcomes as alternative mechanisms that increase reform efforts. The paper derives the optimal use of those mechanisms and discusses their implementability.