Policy Coordination and National Sovereignty in a Monetary Union. Two Easy Recipes

Abstract

The purpose of the European Union is to coordinate the policies of its members. But coordination is a difficult matter: member countries differ in their economic structure and in their priorities and are bound to disagree on the choice of optimal policy. The best intentioned efforts to choose what is right for ‘Euroland’ inevitably must come down to summing and weighing different national interests. Add to this the countries’ fear of further erosion in their national sovereignty, and the problem becomes challenging indeed. It is not too surprising then that so far all attempts at setting rules governing coordination in policy choices have shared two features: apparently strict but arbitrary and finally not credible criteria; and sufficient leeway for politically negotiated exceptions. This was true of the Maastricht criteria for entry into the Monetary Union; it is true of the ceilings on fiscal deficits established by the Pact for Stability and Growth; of the official voting rules in the European Central Bank; of the decision-making procedures for the Council of Ministers newly negotiated at Nice.

Work on this paper began at the Russell Sage Foundation, whose hospitality and financial support are acknowledged with gratitude. I thank Rich Clarida, Gary Fields, Peter Kenen and Bart Lipman for helpful conversations, and Cheryl Seleski for assistance. Special thanks to Maurice Obstfeld for noticing an inconsistency in the paper’s preliminary version.