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Chapter 9 deals first with the reforms needed for the cornerstones of the EMU macroeconomic policies, i.e. the common monetary policy and the macro-prudential regulation that has recently added to it. As to the former, one of the main proposals is to raise its optimal target, for reasons that add to those recently suggested by some eminent economists; in addition, the prohibition to the ECB to act as a lender of last resort to governments should be reconsidered. As to the latter, the need arises of strengthening the existing legislation. On the other hand, fiscal policy is the Cinderella of the EMU macroeconomic policies and its deflationary and asymmetric orientation, to which the fiscal compact has recently added, is to be radically reconsidered, moving towards a fiscal union. Finally, wage policy can be implemented in a way to help dealing with the different country structural problems in a way that cannot be done by the common monetary policy.
Chapter 2 describes the institutional background for the analysis of the imbalances that emerged over time, in Europe, which are central to our enquiry. The main aspect of the EMU institutions is their “incompleteness,” from the point of view of a more “mature” one, of the kind of a federalist structure. Incompleteness derives from a strong measure of persistent national, and thus, independent decision-making that interacts and overlaps with the few common institutions and often dominates over them. The EMU’s design is founded on a few common institutions, a single currency (to which a common macroeconomic policy has added recently) and the free operation of markets, as well as harmonization of some rules. All the other policy instruments are to be managed by the member states, with constraints on some policies, especially fiscal policy. Wage policy is completely disregarded. Thus, most national borders are maintained. In the mind of the founding fathers of the Union, these common institutions were necessary, and sufficient conditions for getting rid of frictions and the uneven distribution of resources and opportunities across the countries, thus resulting in a uniform process of growth of the whole Union.
Chapter 10 deals with microeconomic policies, which are normally complementary to macroeconomic ones and therefore must be implemented in addition to, or in conjunction with, them. No analysis of macroeconomic policies can do without a parallel study of the microeconomic ones, which can pursue multiple objectives at a time. Some reforms do not involve costs for the EZ as a whole and only require law amendments or regulation for coordination of different policies. Pursuance of many of the targets of microeconomic policies requires instead availability of funds. From this point of view, the scope of these policies is severely limited currently at the EZ level. In addition, the Commission has recognized that funds are spread over too many programmes and instruments. The need arises that the new budget overcomes the current failure to distinguish between economic, social and territorial cohesion and between the intermediate steps necessary to guarantee each. Mixture of the final objectives can only cloud the assessment of each project and make check of its implementation difficult. Some improvement would derive from the indication of fixed targets for each goal. More decisive improvements would require further enlarging the EU budget and focusing on specific targets.
In Chapter 3 we sketch the roots of the EMU institutions in terms of the theories and the interests shaping them. This makes it easier to understand in Part II the imbalances that arose in the Union, largely descending from the free trade orientation of its institutions as well as from the different interests of countries and sections of the population. The monetarist and New Classical Macroeconomics theories, popular at the time when the institutions of the EMU were devised, played an important role for the choice of the institutional design. However, the existing theories were only partly implemented (e.g., the requirements of the Optimal Currency Theory were not satisfied) and later revisions of the accepted theories – asking for a different orientation of the initial institutions and current policies – have been ignored. Other factors, of the nature of vested interests, at the roots of the different growth models pursued by the various countries, added to existing theories and can explain together with them both the institutional design and the policies implemented by the Union.
The policies implemented in the EMU and the differences with the United States are described in Chapter 6. They added to the negative consequences of the institutional differences. The content of the policies implemented in the two areas was rather different. More importantly, the evolution of the crisis and the outcomes of policies remarkably differ. In Europe the original determinants of the crisis were of a purely financial nature, as in the United States. However, they evolved into a sovereign debt crisis, which was not the case in the United States. We attribute this largely to the different institutions in the two areas, in addition to the policies enacted, which were anyway to a large extent constrained by these institutions. Policymakers were either incapable of taking the opportunity to reform them or interested in keeping them and making them to serve national or other interests. Monetary policies have prevailed in both the United States and EMU, but in Washington they have been complemented by federal fiscal policies in the initial, decisive, phase of the crisis. By contrast, no similar expansionary policy was implemented in Europe, where fiscal policies were managed at the state level and were generally deflationary.
Chapter 4 deals first with the asymmetries between the different countries pre-existing to the EMU, due to behavioral and structural factors also of an inertial kind in peripheral countries (but also in the core to some extent). Asymmetries showed themselves mainly in the public accounts of some of them as well as in other features of the economies of all peripheral countries, such as higher inflation rates, and derived mostly from diffuse inefficiencies, but also, to some extent, from the different weight of the services and the productivity profile. Persisting these structural differences between peripheral and core countries, together with the high (low) level of domestic demand deriving from high (low) public spending and the higher (lower) wage rises, the current account of the former (the latter) would tend to be negative (positive). This did not worry the majority of scholars, but the lasting imbalances in the domestic and external accounts of each country that emerged when the Union began operating aggravated the crisis originated elsewhere, but developed in forms and with an intensity that appear as built-in in the way European institutions were devised as well as in the different growth strategies pursued by the various countries
This chapter examines the consequences of institutionalization on regime outcomes: primarily leadership succession. I show that institutionalized regimes are more likely to undergo peaceful leadership transitions.
This chapter provides empirical tests of the theoretical argument made in Chapter 2. I show that initially strong leaders (measured by examining how leaders came into power in Africa) are less likely to institutionalize their regimes.