Presentation by Ariel Sheen

Policy-Making in EMU: Strategies, Rules and Discretion

Primary Policy Goal

Strategic Policy Goal

Strategic Policy Rule

Strategic Policy Formulation Foal

Price stabilityCentral Bank Independence

Sound Public Finances for Sustainable Growth

Comprehensible Strategic Policy Rules

PRIMARY POLICY GOALS

“Analysing all available information carefully and continuously in order to arrive at a

comprehensive assessment of developments, of the shocks to the economy, and of the

assoicated risks to price stability.”

This is accomplished in an atmosphere of limited transparency by the Governing

Council in order to maximize price stability.

STRATEGIC POLICY GOAL

Presuming that monetary policy should be made conditional on the circumstances. Medium-term orientation allows for a

gradual response to come economic shocks.

Precise policy formulation depends on the nature of the volatility, allowing for some political discretion. Inflation is the target, but there are many ways of achieving that.

STRATEGIC POLICY RULE

By prioritizing neither “economic analysis” or “monetary analysis”, but using both of these as pillars from which to arrive at a robust policy

assessment of the conditions in an eclectic manner reduces risks to creating price instability.

The rule is not that there are no rules, but that all knowledge is imperfect and thus decisions made

by policy making bodies are not unduly limited by either method.

STRATEGIC POLICY FORMULATION RULE

Overly simplistic assessment of markets using the k-percent rule, or key variables related to

a single object or pre-chosen basket of objects.

“Such rules are not well suited to the formulation of the monetary policy in the EU

area… as they don’t accommodate money demand shocks… or structural change and

innovation in finacial markets.” (28)

EXCLUDED RULES FOR STRATEGIC POLICY FORMULATION

The need to create an predictable environment in order to enhance policy effectiveness and

credibility avoids perception of uncertainty in the market and bolsters confidence in the

monetary policy transmission process.

This is the discretionary aspect of the policy formulation rule which, being EMU managed,

increases benefits and spreads out risks across the EU area.

INCLUDED FACTORS IN STRATEGIC POLICY FORMULATION

This fiscal framework, largely based on the rules in the Maastricht Treats and the Stability and

Growth Pact gave the directive to keep government deficits close to or below 3% had

been breached multiple times by core and peripheral countries. This has led critics to state

there should be a new and better set of fiscal rules with some degree of enforceability.

Another words, there’s a need for fiscal rules not only to be simple, transparent and consistent with a limited degree of flexibility but also enforceable.

AND WHEN RULES ARE BROKEN?

In March 2005, the EU Council of Economics and Finance Ministers agreed to changes in the

Stability and Growth Pact that comprised of three elements.

1. New arrangements to improve national governance and ownership of the fiscal

framework.2. Strengthening of the provisions which prevent

the emergence of excessive deficits.3. Increased flexibility of the Pact’s “corrective

arm”.

NEW RULES

Wait and see what happens, I’m writing this in 2006!

There is a clear implementation gap that needs to be closed if aforementioned rules are to be

considered legitimate. Furthermore if the Lisbon Strategy, “the plan for creating the most

competitive and dynamic knowledge-based economy in the world that is also capable of sustainable economic growth with more and

better jobs and greater social cohesion", is to be achieved than policy makers in member states

need to adopt neoliberal policies at a faster pace.

DO THESE RULES REALLY RULE?

Yes.

“The ECB’s monetary policy has effectively succeeded in maintaining price stability in the euro area as a whole, thus

establishing a necessary condition which is essential for sustainable economic growth. The performance of a number

of countries in the euro area provies telling evidence that the overall policy framework – with its combinatino of

strategies, rules and constrained discretion – is capable of delivers robust non-inflationary growth in the Member States, provided that appropriate fiscal and structural

policies are implemented effectively” (37).

DO THESE RULES GENERALLY RULE?