Many well-known economists argue to achieve a prospering economy; it is crucially important to have an efficient collaboration between a country’s monetary policy, concerning a stable currency and inflation rate, as well as a proper fiscal policy, including structural reforms and governmental spendings.
In the backdrop of this opinion, the European Monetary Union (EMU) was established in 1999, in which the monetary policy for several countries is centralised in one institution, the European Central Bank (ECB). This is a massive achievement, as for most of Europe’s history, it has been at war with itself, which did not foster any trade or other kinds of economic co-operation. Europe was always a continent of trade barriers, tariffs and different currencies. Therefore, doing business across borders was always highly sluggish, and in the light of all these obstacles, it tended to stifle economic growth. After World War II has left Europe in a devastating condition, the natural choice to rebuild the continent was to remove these ancient barriers. By implementing the Euro in 1999, this went even a step further. Domestic currencies ended to exist as well as the very individual monetary policies. In consequence the national central banks shifted the control to the newly formed ECB. The Eurozone had now one unified monetary policy, but still many different fiscal policies in the respective member states. Before the Euro was born, countries like Greece or Italy not only had to pay high interest rates to borrow money, they also could only lend a limited amount, as lenders were not comfortable providing them too many credits. However, as they became members of the European Monetary Union, the tables turned, because big security providers, like Germany, were now part of it.
Table of Contents
1. Introduction
2. The choice between monetary and fiscal policy
2.1 Historical development
2.2 Evolving monetary policy and its duties
2.3 ECB – guardian of the price stability
2.4 Effectiveness and developments until the crisis
3. Imbalances in the Eurozone
3.1 A divided union
3.1 Spain’s situtation before the crisis
3.2 Germany’s situtation before the crisis
3.3 Specific imbalances between Spain and Germany
4. Monetary policy reaction to the crisis
4.1 Fixed-rate full-allotment procedure
4.2 Covered Bond Purchase Program
4.3 Security Market Programme
4.4 Outright Monetary Transactions
4.5 Asset Purchase Programme
5. Asymmetric reactions to the crisis
5.1 Reforms and measures in Spain
5.1.1 Financial market reforms
5.1.2 Fiscal measures
5.1.3 Labor market reforms
5.2 Germany’s reaction to the crisis
6. The ECB – a controversial political actor
6.1 Influencing politics in the EMU
6.2 Influencing the ECB’s decisions
6.3 Breach of the law or necessary measure ?
7. Interplay between monetary and fiscal policy
7.1 (Missing) structural reforms prior to the crisis
7.2 Lost incentives?
7.3 Structural Reforms – a ‘convenient myth’?
7.3 Germany – driver or stability anchor in the crisis
7.4 Ways out of the crisis
7.5 Alternatives
8. Concluding remarks
Objectives and Core Themes
This bachelor thesis examines the complex interplay between the European Central Bank’s harmonized monetary policy and the country-specific fiscal policies of member states. The research specifically investigates how structural differences and missing reforms prior to the financial crisis contributed to asymmetric economic outcomes in the Eurozone, utilizing the contrasting experiences of Germany and Spain as primary case studies.
- Analysis of the historical evolution and mandate of the European Central Bank.
- Evaluation of pre-crisis economic imbalances between core and periphery nations.
- Assessment of the ECB's unconventional monetary policy interventions during the crisis.
- Comparison of structural adjustment measures and fiscal reactions in Spain and Germany.
- Critique of the effectiveness of austerity and structural reforms in a monetary union.
Excerpt from the Book
3.1 A DIVIDED UNION
The EMU can be divided into two parts. First, the northern states, who are pursuing an export-driven strategy, which is determined above all by competitive advantages. These countries depend on global demand to boost their economy. This strategy rejects expansionary policies, as these would lead to increasing wages, which would consequently imperil the competitiveness of their exports (Hall, 2012). Furthermore, especially countries like Germany were huge supporters of balanced governmental households and sustainable management. Secondly, the southern part of Europe is determined by a demand-driven economy. These countries navigated their fiscal policy to foster their domestic demand. As a result of the common currency, it was no longer possible to depreciate exchange rates against their main trading partners, resulting in „some perverse effects “(Hall, 2012, p. 360). Since the southern countries obeyed the promotion of domestic demand, inflation rates were comparatively higher than in the north. Consequently, unit labour costs progressed (Hall, 2012) Ironically, this was additionally backed by the EMU itself. As outlined in Part 2 the ECB sustains a joint monetary policy for all member states and thus were not willing to overcome inflation in the periphery, as it could hurt the extension in the core countries. In result, inflation rose further, therefore diminishing the south‘s borrowing even more. Meanwhile, the northern nations produced sizeable current account excesses, which in turn was entrusted through investments and credits to the demand striving south, cherishing consumption again. One could argue, the praised convergence process within the heterogeneous union has not occurred.
Summary of Chapters
1. Introduction: Outlines the goal of efficient collaboration between monetary and fiscal policy and introduces the backdrop of the European Monetary Union, noting the economic divergence between member states.
2. The choice between monetary and fiscal policy: Discusses the theoretical framework of central bank mandates and the evolution of monetary policy instruments, highlighting the ECB's focus on price stability.
3. Imbalances in the Eurozone: Analyzes the structural economic divergences between northern and southern member states, specifically detailing the pre-crisis conditions of Spain and Germany.
4. Monetary policy reaction to the crisis: Examines the ECB’s implementation of unconventional measures, such as LTROs, SMP, OMT, and APP, in response to the sovereign debt crisis.
5. Asymmetric reactions to the crisis: Provides a comparative analysis of how Spain and Germany navigated the crisis, focusing on specific reforms in financial, fiscal, and labor market policies.
6. The ECB – a controversial political actor: Evaluates the ECB's role as a political entity, the influence of national interests on its decisions, and the legal controversies regarding its mandates.
7. Interplay between monetary and fiscal policy: Explores the failure of structural reforms to foster convergence and critiques the efficacy of current austerity measures in an environment constrained by the zero lower bound.
8. Concluding remarks: Synthesizes the main findings, suggesting that the current austerity-focused policy approach may be detrimental to long-term European recovery and calling for more intensive fiscal coordination.
Keywords
European Monetary Union, European Central Bank, Monetary Policy, Fiscal Policy, Structural Reforms, Sovereign Debt Crisis, Eurozone Imbalances, Spain, Germany, Austerity, Financial Integration, Economic Growth, Unemployment, Unit Labour Costs, Convergence
Frequently Asked Questions
What is the core subject of this thesis?
This thesis explores the structural and policy-based interplay between the centralized monetary authority of the ECB and the individual fiscal policies of Eurozone member states, focusing on why economic convergence failed.
What are the primary themes discussed?
The study centers on the causes of Eurozone imbalances, the ECB's unconventional crisis interventions, the comparative effectiveness of national structural reforms, and the political tensions between core and periphery countries.
What is the main research objective?
The primary goal is to analyze the antithetic progression of Eurozone member states during the crisis and evaluate whether current policy frameworks—specifically austerity and structural reforms—effectively address the underlying economic disparities.
Which scientific methodology is employed?
The research conducts a comprehensive review of economic literature and analyzes empirical data, specifically utilizing macroeconomic indicators (GDP, ULC, current accounts) and case studies of Spain and Germany to support its arguments.
What topics are covered in the main body?
The body covers the historical development of monetary policy, a detailed breakdown of pre-crisis imbalances, the shift in the ECB’s policy stance during the crisis, and the subsequent implementation of austerity and market-liberalizing reforms.
Which keywords best characterize the work?
The work is defined by terms such as European Monetary Union, economic divergence, structural reforms, austerity, and ECB unconventional monetary policy.
How does the author characterize the role of Germany in the crisis?
The author argues that Germany acts as both a stability anchor and a driver of further divergence, as its persistent pursuit of austerity and high trade surpluses creates deflationary pressures that hinder recovery in peripheral countries.
Why were the ECB's unconventional measures considered controversial?
The measures, such as government bond purchases, are controversial because they raise legal questions regarding the ECB’s mandate and the prohibition of direct monetary financing, leading to friction between European institutions and national constitutional courts.
- Citar trabajo
- Philipp Huber (Autor), 2018, The interplay between (missing) structural reforms and monetary policy, Múnich, GRIN Verlag, https://www.grin.com/document/494250
