Cover: The cover graph shows GDP growth (white line) and inflation (private consumption deflator) (grey line) in the Eurozone, using outturn data for

Transcription

1 FROM EMS to EMU

2 Cover: The cover graph shows GDP growth (white line) and inflation (private consumption deflator) (grey line) in the Eurozone, using outturn data for 1979 to 1997 from the OECD's December 1998 Economic Outlook and forecasts for 1998 to 2001 from the 'World Economy' report in the January 1999 National Institute Economic Review.

3 From EMS to EMU: 1979 to 1999 and Beyond Edited by David Cobham and George Zis on behalf of the Money, Macro and Finance Research Group

4 First published in Great Britain 1999 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN ISBN (ebook) DOI / First published in the United States of America 1999 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y ISBN Library of Congress Cataloging-in-Publication Data From EMS to EMU to 1999 and beyond /edited by David Cobham and George Zis on behalf of the Money, Macro and Finance Research Group. p. cm. "Papers presented at a conference held under the auspices of the Money, Macro and Finance Research Group on 30 January 1999 at the London Business School, a date nearly thirty years from the start of the European Monetary System and one month after the inauguration of Economic and Monetary Union in Europe"-Introd. Includes bibliographical references and index. ISBN (cloth) 1. Monetary unions-european Union countries-congresses. 2. European Monetary System (Organization)-Congresses. 3. European Monetary Union-Congresses. I. Cobham, David P. II. Zis, George. III. Money, Macro, and Finance Research Group. HG925.F '94-dc CIP Selection and editorial matter David Cobham and George Zis 1999; Chapter 2 Ignazio Angeloni, Vftor Gaspar and Oreste Tristani; Chapter 3 George Zis; Discussion of Chapter 2 Charles Goodhart; Chapter 4 Jürgen von Hagen and Rolf Strauch; Chapter 5 Stephen Bazen and Eric Girardin; Chapter 6 Vincenzo Chiorazzo and Luigi Spaventa; Discussion of Chapters 4, 5 and 6 John Driffill; Chapter 7 Michael Artis; Chapter 8 John Curtice; Discussion of Chapters 7 and 8 Philip Stephens and Martin Weale; Chapter 9 Paul De Grauwe, Hans Dewachter and Yunus Aksoy; Discussion of Chapter 9 Andrew Haldane; Chapter 10 Robert Pringle and Matthew Turner; Discussion of Chapter 10 Joseph Bisignano; Chapter 11 Paul Mizen; Discussion of Chapter 11 Alan Sutherland; Epilogue David Cobham Softcover reprint of the hardcover 1st edition 1999 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence premitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources

5 Contents List of Figures List of Tables Contributors 1 Introduction David Cobham and George Zis vii Vlll X 1 2 The Monetary Policy Strategy of the ECB 3 lgnazio Angeloni, Vftor Gaspar and Oreste Tristani Discussion of Chapter 2 39 Charles Goodhart 3 The European Monetary System: an Unexpected Success? 43 George Zis Discussion of Chapter 3 66 Christopher Allsopp 4 Tumbling Giant: Germany's Experience with the Maastricht Fiscal Criteria 70 Jiirgen von Hagen and Rolf Strauch 5 France and the Maastricht Criteria: Fiscal Retrenchment and Labour Market Adjustment 95 Stephen Bazen and Eric Girardin 6 The Prodigal Son or a Confidence Trickster? How Italy got into EMU 129 Vincenzo Chiorazzo and Luigi Spaventa Discussion of Chapters 4, 5 and 6 John Drif.fill The UK and EMU Michael Artis Can Britain Join the Euro? Political Opportunities and Impediments 181 John Curtice v

6 VI Contents Discussion of Chapters 7 and Philip Stephens Discussion of Chapters 7 and Martin Weale 9 On the Conduct of Monetary Policy in an Asymmetric Euroland 208 Paul De Grauwe, Hans Dewachter and Yunus Aksoy Discussion of Chapter Andrew Haldane 10 The Relationship Between the European Central Bank and the National Central Banks within the Eurosystem 231 Robert Pringle and Matthew Turner Appendix 1: The Legal Basics 242 Appendix II: Voting Methods in the Governing Council 251 Discussion of Chapter Joseph Bisignano 11 The Emergence of International Currencies: Will the Euro be Used Internationally? 260 Paul Mizen Discussion of Chapter Alan Sutherland 12 Epilogue 284 David Cobham Index 292

7 List of Figures 2.1 ECB interest rates and the overnight market interest rate 30 2A.1 j-loci: full and no pass-through cases Wages and productivity in East and West Germany, Recursive (one step ahead) residuals for household consumption equation Fit of the estimated consumption function over the 1990s The relationship between the unemployment rate and the logarithm of employment in France, The relationship between the unemployment rate and the logarithm of employment in the United Kingdom, Wage and price inflation The share of wages in value-added Actual, fitted and predicted values of wage inflation, price inflation and change in unemployment for model, 1966:2-1983: Actual, fitted and predicted values of wage inflation, price inflation and change in unemployment for model, 1966:2-1989: The BTP-Bund spread Consumer price inflation: Italy and Germany Trends in Italy's primary expenditure Relative fiscal correction and relative growth performance, Relative fiscal correction and relative growth performance, Costs and benefits of monetary union Shock correlations with Germany, A Correlations of business cycle components, 1965:5-1979: B Correlations of business cycle components, 1979:4-1997: Merging process by group average clustering Support for EU membership Staff numbers at EU -11 central banks Staff numbers in the Eurosystem 239 VII

8 List of Tables 2.1 Eurosystem monetary policy operations German inflation and interest rate, Germany's fiscal performance, The labour market in East Germany, Public gross transfers to East Germany, Financial transfers of the Federal Government, Ratio of contributions to expenditures for unemployment insurance and pension fund The Treuhand expenditures, revenues and debt, Tax changes from major tax initiatives for selected tax categories, Share of income and corporate income tax Tax forecasts - deviations from actual values, Public debt in the 1990s Macroeconomic performance Measures of fiscal stance Dynamics of public debt: determinants of the changes in the debt/gdp ratio Change in cyclically adjusted primary deficit Efficiency ratio of fiscal adjustment Composition of the public sector borrowing requirement Fiscal adjustment: size and composition Characteristics of the French fiscal retrenchment programme Macroeconomic background and effects of French fiscal action Household savings rate Household consumption function, 1971:4-1997: Gross job creation and job destruction, Diagnostic tests on initial system, 1966:2-1983: Cointegration statistics, 1996:2-1983: Diagnostic tests on the system, 1984:1-1997: Cointegration statistics, 1996:2-1989: Italy's convergence process Italy: general government accounts Primary balances and primary expenditures - ratios to GDP 139 viii

9 List of Tables ix 6.4 Composition of the changes of the primary balance - General Government- ratios to GDP Italy: debt stabilisation Italy: contributions to the 1997 fiscal adjustment Fiscal adjustment and growth performance, Shock correlations with Germany, The US and Germany as benchmarks Clusters detected under hard clustering Fuzzy clustering: membership coefficients Public attitudes towards a single currency Reported euro-referendum voting intentions Logistic model of vote switching and attitudes towards a single currency, Attitudes towards a single currency by class Logistic model of attitudes towards the euro Attitudes towards the euro by party identification, 1992 and Attitudes towards single currency by newspaper readership Optimal feedback rules Correlation of desired and decided interest rates Loss functions Welfare losses (%) from pursuing ESCB rule Share of weighted votes Voting methods in Governing Council EU, North America and Japan: selected indicators of the size of the capital markets, Currency denomination of exports and imports: selected industrial countries, (%) Use of selected currencies on one side of transaction as a percentage of global gross foreign exchange market turnover; average daily foreign exchange market turnover; relative shares of total net turnover by currency pair Use of currencies as exchange rate pegs; shares of major currencies in total foreign exchange reserves, EU countries' gold and foreign exchange reserves after EMU Potential increases in international holdings of euro assets 277

10 Contributors Christopher Allsopp, Oxford University Yunus Aksoy, Catholic University of Leuven lgnazio Angeloni, European Central Bank Michael Artis, European University Institute and CEPR Stephen Bazen, Universite Montesquieu-Bordeaux IV Joe Bisignano, Bank for International Settlements Vincenzo Chiorazzo, Crediop and Centro Europa Ricerche David Cobham, University of St Andrews John Curtice, University of Strathclyde Hans Dewachter, Catholic University of Leuven Paul De Grauwe, Catholic University of Leuven John Driffill, University of Southampton Vitor Gaspar, European Central Bank Eric Girardin, Universite Montesquieu-Bordeaux IV Charles Goodhart, London School of Economics and Bank of England Monetary Policy Committee Andrew Haldane, Bank of England Paul Mizen, University of Nottingham and CEPR Robert Pringle, Central Banking Publications Luigi Spaventa, University of Rome La Sapienza (on leave), CONSOB and CEPR Philip Stephens, Financial Times Rolf Strauch, ZEI, University of Bonn Alan Sutherland, University of York Oreste Tristani, European Central Bank Matthew Thrner, Central Banking Publications Jiirgen von Hagen, ZEI, University of Bonn, Indiana University and CEPR Martin Weale, National Institute of Economic and Social Research George Zis, Manchester Metropolitan University X