On political grounds, member countries are unlikely to give up significant parts of national economic policy. In turn, this implies that the relatively small common budget most likely is a persistent feature of monetary unions consisting of different countries. This would seemingly indicate that monetary policy as well as fiscal policy at union level, although for different reasons, would be of little use in the event of asymmetric shocks hitting one or more countries. However, despite the absence of formal rules or laws, the euro area appears to be able to handle similar incidents using ad hoc measures. One example is the direct fiscal support to the Netherlands in 2002 when they were troubled by foot-and-mouth disease. Thus, at least in this respect, political determination seems to have replaced a more formal structure. However, the determination has yet to be tested by a large asymmetric shock. Secondly – and still using the euro area as an example – after becoming a member of the monetary union, the fiscal convergence criteria are automatically replaced by the stability and growth pact (SGP). The pact has the same set of rules as the criteria, which is to ensure macroeconomic health among member countries. The difference between the two is that the union has the possibility to penalise members that do not meet the demands of the pact. However, striking the right balance is far from trivial. For fences such as limits for budget deficits to work they have to be rigid, but in practice flexibility is often needed.
Public and political acceptance will be more likely if voters are not only given the possibility, but being helped, to form an opinion and to express it in general elections. Summing up Perhaps somewhat counterintuitive but in line with today’s seminar topic, I would like to end this speech by questioning its underlying assumption. Is it necessarily a problem having to give up national monetary policy when joining a monetary union? The assumption presupposes that what is to be stabilised is mainly driven by factors that can be affected by national policy instruments. Is this really the case? A recent cross-country study suggests that determinants of inflation have become less “country-centric” and increasingly “globe-centric” (Borio and Filardo, 2006). Of course, national stabilization policy still plays an important role, but global factors are becoming increasingly important. At the same time, business cycles in the G7 countries seem to have become increasingly synchronised, thereby narrowing the difference between domestic and global determinants of inflation. 7 As integration increases and differences diminish, monetary unions will have a greater chance of success. This chance will increase further if countries prepare their economies from a stabilizing as well as a structural perspective. Institutionally, frameworks for monetary and fiscal policy, at country and union level alike, should strive for consistency, commitment, transparency and accountability, coupled with independence of policy makers. Most importantly, the aim should be long-term stabilization rather than short-term fine-tuning. Against this back-drop, it is my belief that the advantages of a monetary union outweigh the disadvantages.