Policy-Making in EMU: Strategies, Rules and Discretion

1. Policy-Making in EMU: Strategies, Rules and Discretion Presentation by Ariel Sheen

2. Primary Policy Goal • Strategic Policy Goal • Strategic Policy Rule • Strategic Policy Formulation Foal

3. Primary Policy Goals • Price stability • Central Bank Independence • Sound Public Finances for Sustainable Growth • Comprehensible Strategic Policy Rules

4. Strategic Policy Goal • “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.

5. Strategic Policy Rule • 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.

6. Strategic Policy Formulation 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.

7. Excluded Rules for Strategic Policy Formulation • 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)

8. Included factors in 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.

9. And when Rules are Broken? • 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.

10. New Rules • 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. • New arrangements to improve national governance and ownership of the fiscal framework. • Strengthening of the provisions which prevent the emergence of excessive deficits. • Increased flexibility of the Pact’s “corrective arm”.

11. Do these rules really rule? • 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.

12. Do these Rules generally 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).