Abstract
The design of the European Monetary Union has been influenced by various, and sometimes contradictory, economic ideas and doctrines. Among these, Optimal Currency Area theory and Fiscal Federalism, but even more importantly the macroeconomic and monetary framework adopted in Germany under the influence of ordo-liberalism, and the New Classical views about the functioning of market economies, with a clear distrust of political interferences and a strong aversion toward inflation. The European treaties have embedded specific economic doctrines into institutional and precise policy rules. The Great Recession and the subsequent sovereign debt crisis in the Euro Area have shaken these certainties and led to new thinking of macroeconomic and monetary matters.
Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
(Keynes 1936, 383)
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Of course, all countries have constitutions that include provisions concerning economic policy. But national constitutions are interpreted and can be amended following a well-specified process. In this, the EU is unique. On the inconveniencies of writing detailed policy rules into treaties, see Laurent and Le Cacheux (2006).
- 2.
The first Optica Report had been preceded by the publication in 1975 in The Economist of the “All Saints Day Manifesto” (“A Currency for Europe”), a plea in favor of monetary unification, signed by a few European economists along with some of the authors of the Optica Report. A second Optica Report was published in 1977.
- 3.
Walter Eucken, an economist, and two lawyers, Franz Böhm and Hans Grossmann-Dörth.
- 4.
This “free and undistorted competition” is to be found as a leading objective in the Rome Treaty (1957) already, and in all European treaties since then.
- 5.
In fact, the ordo-liberal doctrine did not take hold of German economic policy-making until after the Second World War, partly under the influence of the US. Indeed, the economic aspects of the German constitution, the monetary reform of 1948, and the law instituting the independence of the Bundesbank in 1957 were dictated by US economists.
- 6.
The application of this result in the field of monetary policy was later published by Barro and Gordon (1983) in a paper that apparently exerted a major influence on the design of monetary institutions in the Euro Area.
- 7.
The relationship between monetary and fiscal policies is of course a long-standing theme in macroeconomic analysis. It is the main message of many of Sargent’s contributions, in particular on policies to fight high inflations (Sargent, 1982). It is also central in the notion of “regimes” developed by Woodford (see, e.g. Woodford 2001).
- 8.
Many contributions have followed suit after Mundell’s 1961 path-breaking paper, including by such authors as Peter Kenen, Ronald McKinnon, and so on. A very useful critical synthesis is provided by De Grauwe (2018, ch. 2) in his classic text on monetary unions.
- 9.
Five EU member states are not in the Schengen space: Ireland and the UK, who have refused to participate, and Bulgaria, Croatia and Romania, not yet deemed legally ready to join. Three non-EU European countries are included in the Schengen space: Iceland, Norway and Switzerland.
- 10.
One of the most popular EU policies, Erasmus, aimed at facilitating intra-EU student mobility, may also be regarded as a means of enhancing people mobility. More on mobility in Chap. 4.
- 11.
There is a significant body of literature on the endogeneity of optimality criteria in OCA analysis. For a recent contribution including many relevant references, see Schiavo (2008).
- 12.
See the critical review offered by De Grauwe (2018) and the references therein.
- 13.
The incentives arising from the EA institutional setting have been analyzed in the previous installments of this series, in particular in Le Cacheux and Laurent (2015).
- 14.
The Fiscal Compact is the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) signed by 25 member states in 2012. More on the TSCG: https://ec.europa.eu/info/publications/fiscal-compact-taking-stock_en. See also Chap. 5.
- 15.
See the developments on this point in Le Cacheux and Laurent (2015) and the references provided therein.
- 16.
The Commission was quick to reinstate the “excessive deficit procedure” after the 2009 Great Recession and to enforce relatively rapid fiscal consolidation in the aftermath of the “sovereign debt crisis” of 2010–2012. The experience of the European Central Bank with non-conventional monetary policies may be an exception. See Chap. 6.
- 17.
Implicit in the insistence of the Commission on the necessary “structural reforms” is the hypothesis that such reforms, in the direction of more flexibility in market mechanisms, do raise potential output. On the hypothesis of invariance of “potential output” and its theoretical foundations, see Le Cacheux (2017).
- 18.
The characteristics of this convergence, sometimes called the “New Macroeconomic Synthesis”, are convincingly described and analyzed by Blanchard (2009).
- 19.
An illustration of the variability of estimates of “potential output” carried out by the Commission is provided in Le Cacheux and Laurent (2015).
- 20.
One such attempt, among others, is described by Stiglitz (2015).
References
Barro, Robert J., and David B. Gordon. 1983. A Positive Theory of Monetary Policy in a Natural Rate Model. The Journal of Political Economy 91 (4): 589–610. http://www.networkideas.org/feathm/sep2006/pdf/Barro_%20Gordon.pdf.
Basevi, Giorgio, Emil Claassen, Pascal Salin, and Niels Thygesen. 1976. Optica Report 75. Towards Economic Equilibrium and Monetary Unification in Europe. https://www.cvce.eu/content/publication/2012/5/29/1403ebca-0839-4eca-9423-c9fcb7452555/publishable_en.pdf.
Blanchard, Olivier J. 2009. The State of Macro. Annual Review of Economics 1: 209–228.
De Grauwe, Paul. 2018. Economics of Monetary Union. 12th ed. Oxford: Oxford University Press. https://academic.oup.com/cesifo/article/59/3/520/281810.
Delors, Jacques, et al. 1989. Report on Economic and Monetary Union in the European Community. Brussels. http://aei.pitt.edu/1007/1/monetary_delors.pdf.
Keynes, John Maynard. 1936. The General Theory of Employment, Interest and Money. London: Palgrave Macmillan.
Kydland, Finn E., and Edward C. Prescott. 1977. Rules Rather than Discretion: The Inconsistency of Optimal Plans. The Journal of Political Economy 85 (3): 473–492. http://www.finnkydland.com/papers/Rules%20Rather%20than%20Discretion%20The%20Inconsistency%20of%20Optimal%20Plans.pdf.
Laurent, Éloi, and Jacques Le Cacheux. 2006. Integrity and Efficiency in the EU: The Case Against the European Economic constitution. Harvard CES Working Papers 130. https://hal-sciencespo.archives-ouvertes.fr/file/index/docid/972707/filename/laurent-lecacheux.pdf.
Le Cacheux, Jacques. 2017. Croissance potentielle : la politique macroéconomique au royaume des aveugles? Revue économique 68 (HS1): 29–39.
Le Cacheux, Jacques, and Éloi Laurent. 2015. Report on the State of the European Union. Is Europe Sustainable. Vol. 4. London: Palgrave Macmillan.
MacDougall, Donald (Sir), et al. 1977. Report of the Study Group on the Role of Public Finance in European Integration. https://www.cvce.eu/content/publication/2012/5/31/c475e949-ed28-490b-81ae-a33ce9860d09/publishable_en.pdf.
Mundell, Robert A. 1961. A Theory of Optimal Currency Areas. The American Economic Review 51 (4): 657–665.
Olson, Mancur. 1969. The Principle of “Fiscal Equivalence”: The Division of Responsibilities Among Different Levels of Government. The American Economic Review 59 (2): 479–487.
Sapir, André, et al. 2003. An Agenda for a Growing Europe: Making the EU Economic System Deliver. Report of an Independent High-Level Study Group Established on the Initiative of the President of the European Commission. Brussels. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.620.4948&rep=rep1&type=pdf.
Sargent, Thomas J. 1982. The Ends of Four Big Inflations. In Inflation: Causes and Effects, ed. Robert E. Hall. Chicago: Chicago University Press. http://www.nber.org/chapters/c11452.pdf.
Sargent, Thomas J., and Neil Wallace. 1981. Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5: 1–17.
Schiavo, Stefano. 2008. Financial Integration, GDP Correlation, and the Endogeneity of Optimal Currency Areas. Economica 75 (297): 168–189. https://hal-sciencespo.archives-ouvertes.fr/file/index/docid/1022326/filename/schiavo-economica.pdf.
Stiglitz, Joseph E. 2015. Reconstructing Macroeconomic Theory to Manage Economic Policy. In Fruitful Economics, Papers in Honor of and by Jean-Paul Fitoussi, ed. Éloi Laurent and Jacques Le Cacheux. London: Palgrave Macmillan.
Werner, Pierre. 1970. Report to the Council and the Commission on the Realization by Stages of Economic and Monetary Union in the Community. http://aei.pitt.edu/1002/1/monetary_werner_final.pdf.
Woodford, Michael. 2001. Fiscal Requirements for Price Stability. NBER Working Papers 8072, January. http://www.nber.org/papers/w8072.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2018 The Author(s)
About this chapter
Cite this chapter
Le Cacheux, J. (2018). Ideas That Made the Euro (and Those That Did Not Make It). In: Creel, J., Laurent, É., Le Cacheux, J. (eds) Report on the State of the European Union. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-98364-6_2
Download citation
DOI: https://doi.org/10.1007/978-3-319-98364-6_2
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-319-98363-9
Online ISBN: 978-3-319-98364-6
eBook Packages: Economics and FinanceEconomics and Finance (R0)