Now the global economy has been experiencing the threat of long lasting financial crisis that evidenced through the bankruptcy of Lehman Brothers, the US investment bank in 2008. It has seriously influenced the global financial system and generated irrevocable conflict to break down the credit markets as well as inter-bank lending without the governmental interference. Fall in property market, collapse of renowned corporate houses and job cut have essentially frozen the investor’s confidence and results a recessionary economy. Due to huge financial conglomerates, the Euro region could not keep them apart from the crisis. Being a younger currency Euro, it is essential to reassess the implications of the introduction of euro for fiscal, wage and trade policy in European economic and monetary union. To do so this paper would analyse the impact of Euro on fiscal, wage and trade policy in the European economic and monetary union with most recent data and policy responsibilities allocated between the national and EU level. The rationales of this paper is to provide an impression of the impact of euro on the macroeconomic aspects of euro zone by highlighting the areas of remaining obstacles to faster integration of economic potential and how the opening of the euro has show the way of structural changes in fiscal and monetary trade and wage policy of EU.
Background of Euro
Euro is the single currency introduced for the European community as a means of common exchange. The main reason behind forming European Union (EU) is to create a uniform market for the whole Europe to break the trade barrier created by the individual states within the continent and to make free exchange of goods and services and flourishing the trade within the region as well as outside the Europe. Actually, the Euro is the result of the agreement signed by member states of Europe name as Maastricht Treaty. At the third phase of the Treaty, the currency has taken place. It was the major outcome of forming the European Economic and Monetary Union (EMU). To monitor and control activities regarding the Euro, the European Central Bank (ECB) has established in Frankfurt, Germany. This institution is formulating the monetary policies for EMU. The ECB conjugation with the central banks of the member states forms the European System of Central Banks (ESCB). This ESCB 1 is implementing the policy taken by the European Central Bank (ECB). After the Introduction of Euro, it has legitimated that the member states of EMU would replace their national currency by the uniform currency Euro. The main motivation of the introduction of euro is a single currency for Europe; the common foreign and defence policy; a common citizenship and an EU parliament with its own power.
Impact of Euro on Fiscal Policy
Before discussing the impact of on the fiscal policy of euro zone, it is necessary to have a look on the vision of euro introduction for fiscal policies.
Vision of Euro Introduction for Fiscal Policies
Hodson (2006) mentioned that the introduction of euro in 1999 was an extraordinary footstep in the field of multinational economics for monetary collaboration and the expectations concerning euro has founded on the theoretical framework of economics. The theoretical framework of euro introduction upholds the vision of gaining the costs and benefits by discarding national monetary sovereignty with transaction cost savings, removing uncertainty, superior price intelligibility with benefits of price stability as well as fiscal and monetary trustworthiness. This agenda also considered from the cost side and argued to subjugate by the competence of member countries to regulate the economic dilemmas with the effects of particular country.
Mundell (1961) demonstrated that asset investing for international risk sharing would serve in an enhanced means of a common currency across a wider region surrounded by the countries would be best, and reasonably poles apart. His theory of optimum currency areas has seriously influenced the EU nation to unite under the single currency where EMU prearranged the low degree of labour mobility within the euro region and perceived inflexibility in its product and labour markets. The key concerns of the imitative were to ensure euro-area member country’s capacity building to regulate the economic shocks by means of country-specific effects rather than the optimality of EMU where the defeat of national interest as well as exchange rates underneath the monetary union strength which is a necessary condition for unconventional mechanisms.
Thus, the fiscal policy has an essential role to play within this modification process along with the schemes ranging from the requirements to boost up national budgetary stabiliser for the formation of an EU system of fiscal policy with structural modification would be indispensable to progress of product, labour and capital markets under the euro zone.
The question of the optimality of the euro zone has centred the attention on the macroeconomic firmness of EMU from the fiscal side with stability and growth concordat of the member countries committed to practice reasonable budgetary policies for the medium-term consideration. The main objectives of the accord was to permit the member countries for an automatic budgetary stabilisers to settle on the economic shocks devoid of excessive budgetary deficits those are injurious for the economic stability of euro zone and the opening of EMU corresponds with a superior responsiveness for EU policy makers. The requirement of structural reformation to progress the performance of EU product, prices, labour, capital markets and wages coupled with the aspiration of accomplishing elevated sustainable growth rate as well as employment opportunities in the EU to generate ambitious structural reformation agenda by 2000.
Experiences of Euro for Fiscal Policies
It is very crucial to assess the expectations of euro introduction and its achievements in context of the fiscal and economic policies of euro zone that has experienced from the starting to present recessionary economy of 2009. For the first time in 2000, the initial impact of euro on the fiscal policy has evidenced to have a positive outcome on the consolidated budget of euro rezone countries providing a positive balance that was totally absent in those countries considering from seventies. On the other hand, it is comprehensible that the strength and escalation accord has initially conceived to unlock the sound budgetary policies for medium-term upon the member countries and the fiscal policy for the duration of pre-EMU period has predisposed to deconsecrate pro-cyclical all through economic upturns as well as downturns. The experience of euro on fiscal and monitory policy has discussed as follows:
- Budgetary deficit: Due to a concentrated endeavour because of several member countries to covenant with the previous fiscal crises and combine their budgetary situation to the proceed of EMU which is a dissimilar representation come out at the preface of the euro by means of the economic upsurge of the fiscal year 1999-2000. It has pointed out as a negative concern of the fiscal stance, argued to reform within the huge budgetary adjustment within EMU, and entailed an extreme budget deficits alarmed on the sustainability of public finances as well as the consistency of fiscal policy of euro zone with a flat performance of EMU.
In November 2003, it has addressed that the persistent budgetary deficits has injured the stability and growth pact’s credibility and argued for suspension of the pact and resulted a budgetary rules reform by EMU in March 2005.
- Growth and inflation: The growth and inflation diversity of the monetary unions has featured a normal phenomenon in euro zone and reflect an array of factors together with variation of population growth and the consequence initiatives to catching-up the rich by less-rich member countries. The differences among the member countries have reduced in current years and the decrease of policy errors outstanding to improved macroeconomic-policy harmonisation with an optimistic expansion for EMU. The explanation of importunate growth and inflation difference within the euro zone is the cost and price aggressiveness between the members states are adjusting very slowly with shifting economic conditions and slothful of productivity growth with wage growth is very low with productivity expansions are amongst the features motivating this decreasing competitiveness.
- Free movement of labours: In the euro zone, the structural reforms have contributed to speed up competitiveness modification in the process of wage resolve within member countries that generate better regards to productivity improvement and it would facilitate greater wage flexibility, which would match aggregate wage temperance of the most member countries. On the other hand, the labour market transformation should go ahead with the measures of boosting competition in the goods and services market to address non-price features weigh up on export performance within the euro zone by attractive productivity growth and eradicating the residual barriers to trade and promoting competition within the internal market.
Monetary and fiscal expansion
EC (2009) pointed out that the fiscal situation of euro area has advantaged from years of triumphant consolidation and up to 2007 fiscal situation in the euro-area has progressed encouragingly. In 2005, the budgetary deficit has reduced to 0.6% of GDP at the same time, as the decrease in the structural deficit, which was 2½% in 2005 and the debt ratio has reduced from 70% to 66% when the non euro-area member countries have faced excessive deficit.
Experience of Global Financial Crisis
The global financial crisis of 2008 has punched the euro-area’s public finances durably and budgetary positions get worse for the first instance in the history and the average captioned deficit attained 1.9% of GDP which is 1.3 % upper than the GDP of 2007 (Figure-1).
For global financial crisis, the expansion of the captioned deficit has coordinated with a slighter drop of the standard structural balance such as cyclical factors and other temporary measures (Figure-2) that has argued a reduction of 1% of GDP placing the structural balance of 2008 at 2 %. It has demonstrated that the rise in the captioned deficit was just a primarily nature when the current structural balance indicates that it has seriously affected with the unstable chrematistics of tax revenue and remarkably floating in relation with 2007.
The EC annual report (2009) has demonstrated that the improvement of medium-term budgetary objectives in 2008 was very limited and the policymakers are at a standstill concerned with the structural fiscal adjustment of the individual states. Under the financial downturn of 2008, the government debt spring back to a degree of public interventions within the euro area when the debt to GDP ratio jumped 3.3% points and accounted 69.3% and demonstrated in Figure 3.
The above figure demonstrates that the government debt-ratio has gained after evidencing a steady downwards line for about a decade and the boost in debt presented the huge acquisition of financial assets within the composition from financial rescue packages introduced by the governments.
In 2008 with shock of global financial downturn, the government revenue in the euro-area has reduced noticeably. The government revenues of euro-area have cut down 45.5 % and 44.8 % of GDP of 2007 and 2008 respectively. Most of the member states evidenced huge shortfalls for lowers than predictable growth and the drop off in taxes has particularly manifest in some states due to the slump in property market and related fall taxes. With the blow of standard stabilizers, some of the countries used some flexible fiscal measures to trim down income taxes such as social contributions, increasing the area of corporate and personal income tax and increase in the upper limit of social contributions when a few of the member states has advantaged from non-tax gas revenues.
In 2009 to overcome the impacts of global financial downturn, the member countries have cultured that reformation framework of euro-area must go ahead without any delay to improve the implementations of labour, product and capital markets as well as necessary upgrading of their budgetary positions.
Aspiration behind the Emergence of EURO
Hill (2005) described that there are five specific reasons behind the emergence of Euro. Here are the briefly explain those reasons.
- Cost Minimization: The single currency certainly minimize the cost in terms of lower exchange rate and hedging cost. Previously who hold multiple currency, need to bear the extra cost derived from the exchange of the currencies. It is also equally applicable for the business organization.
- Price Comparison: Euro would facilitate the price comparison of the same commodity in various region of the community. As, a customer can compare the price in different area before finally buy the product. It largely benefited the customers in shopping goods.
- Intense Competition: Due to the intense competition in the market, the company will force to cut their price to competitive in the market. For this reason, the producer will try to explore the low cost materials to gain the expected profit. In the long-term, it will be beneficial for both the customer and the producer.
- Boost Capital Market: The introduction of common currency will boost up the capital market of Europe by circulating more liquid in the market. As a result, the cost of the capital will be decrease and the proper allocation of the fund has achieved.
- Disperse Investment: The common currency creates the unified market. Therefore, the investor can invest their money in more than one prospective project. As a result, the risk would diversify among various investments. If one project fails then another project will gain. Therefore, the balance will take place.
The Trends of Labour Market in Euro-Zone
In the time of market economy, someone may argues that importance of Labour will not get that much attention but till today for the social well-being as well as for the economic progress Labour market is paramount issues. The accelerating rate of employment along with rise in the pay scale create a positive impact on the economy as Labour productivity is one of the major forces of economic development. The increasing wages create more consumption and ultimately affect the GDP in an expecting manner. In this section, this research will try to portray the Labour market of Europe giving importance to development of employment rate. In Companion, report to the ELNEP economic forecast and policy recommendations (2008) argued that the main aim of EU regarding the Labour market is to increase the proportion of working age people to the employment. Now it has described the major trends of the Labour market in European Union.
- Employment Rate: European Union set a target of 70 percent increase on the total employment over current rate for the EU nations. It would achieve in 2010 but with in 1999 the rate was 61 percent, which clearly indicate that the employment opportunity is substantially increased.
- Working Hours: Another major trend of the Labour market is the raising dependency on working in hourly basis. It is a drawback for the economy as the total working hour is stratified and the Labour productivity has decreased. As a result, the employment progress is slothful and the workers treat the work as growth less job.
- Participation of Women in Work: ELNEP (2008) argued that the participation of women in the work is increasing dramatically. The reason behind this is the dominance of service industry over the manufacturing industries.
- Youth Employee: The rate of youth employee in the job is not changed. This is because the youth are more involved with their education.
- Labour Shortage: In the recent time, the manufacturers face a Labour shortage for their manufacturing plans. This is because of the growing importance of service sectors. Another reason behind this is the free movement of Labour within Euro-Zone.
- High Level of Migration: After the formation of EU, the migration rate in member states increasing highly as it is before. Various data shows that the EU member countries experience high level of migration in the recent time. This is because of the fascination of the lucrative job and high standard of life.
- Tight Labour Market: Tight Labour market reflected high wages and the bargaining power of the worker, which in turn positively affect the Labour market. In EU most of the member countries Labour market is tight enough that the average income of the person is a little bit higher then the level of living standard.
- Increased Productivity: most of the EU member countries experience a better percentage of productivity. It is very close to the average productivity target of the EMU. So of the country exceed the line.
The Sudden Spank of Downturn
After 1930, the world economy experiences another downturn, which started from the first quarter of the year 2008. The origin of this downturn is from the USA. However, within a very few time it engulfs most of the major economies of the world including the European Monetary Union (EMU). It adversely affect the European Labour market also which showing continuous job loss by the worker. Economists confer that the downturn will continue until the last quarter of the year 2010. The Annual Report on the Euro Area (2009) indicates some consequences resultant form the economic downturn and here in this section those issues has addressed as follows:
- High Rate of Unemployment: The main affect of recession on the EU nations is continuous enlargement of unemployment. Form the third quarter of 2008 the rate of unemployment is gradually increasing. Country like Spain, Germany, UK face severe cut down in their number of employments. Increase economic pressure force the companies to shorten their Labour force to reduce the cost. Some of the big companies experience bankruptcy.
- Reduction in Labour hours: EC (2009) reported that most of the companies use hourly payment on the work in Europe. This organization cut their Labour hour to minimize the cost. This has created to avoid the lay-off, which may create the unemployment rate a step further.
- Increasing Unit Cost of Labour: due to the recession, the unit Labour cost is significantly increased. As the productivity has declined, the unit Labour cost has amplified. The cost of the company is enlarged in a considerable extend. It ultimately affects the total productivity.
Trade Policies within the EMU
Baldwin (2005, p. 1) argued that introduction of Euro was the greatest economic policy experiment in the world and it has significant impact on trade policies as 30 percent of world trade as well as 300 million people establish themselves using Euro. He also added that it has changed the entire system or policies, for example, it had influence from union’s salary bargaining to educational exchanges, money markets, bond markets, and foreign exchange. Rose (2000) mentioned that the introduction of Euro has huge positive impact on international trade policies and little negative effect of exchange rate volatility and the effect is statistically important and economically large. He explained the trade policy as the augment in trade stemming from single currency is one of the few undoubted gains from EMU and substituting a common currency for several national currencies decreases the transactions costs of trade within those countries and it would lead to an increase in the depth of trading relations.
According to the view of economists, intra-EU trade may simply mount a little because of the Euro and exchange rate instability was low before European Monetary Union. However, it would have vital repercussions if euro considerably enlarges trade such as:
- The trade disputes and frictions will increase just because the volume of international trade rises;
- Higher levels of trade could direct to additional synchronisation of business cycles across EU Nations;
- faster financial integration is probable to lead to larger political integration;
- Increase universal integration because non-EU countries for example Asian and the Gulf countries, developed countries like Argentina and Canada would like to join a single currency region.
The reason behind the increase of trade
Mongelli & Vega (2006) and Bladwin (2005) show the reason behind the increase of trade after introduction of Euro and Nitsch & Pisu (2008) argued that the boost in trade because of the euro is possible to have generated by a rise in the number of exporters as well as products traded across borders. Nitsch & Pisu (2008) further added that because of declining the fixed or variable expenditure of exports, the euro has facilitated formerly non-exporting organization to initiate exporting and existing exporting corporations to increase the range of products they sell in a foreign country and then Nitsch & Pisu (2008) compared these data with those EU countries whose do not join the euro. They also tried to find out few the answers of questions such as practical a change in the number of traded goods or the number of exporters and the impact on price of traded products.
Finally, Nitsch & Pisu (2008) scrutinized the data at the organization level and identified that it has increased the propensity of business organisation to export to Euro zone as the euro has made exporting them profitable.
Baldwin et al (2008) reported Rose effect results where Rose argued that the trade among intra-Eurozone has increased dramatically after 1999.
However, According to the Article 23 of EC, the EU members are not a Free Trade Area 2 where the members are authorised to implement their tariffs and duties but the EU members are obliged to comply with the Common Customs Tariff 3 decided by the EU Customs Union for the trade with non-member countries. EU member countries have no longer independence to set up the customs duty but implement CCT ever since 1968. Moreover, in Article 25, EC prohibits customs duties on imports and exports in order to increase the trade in euro zone
Respond to Recovery Plan EERP
In November 2008, the European Commission has presented the European Economic Recovery Plan (EERP) for an integrated response of euro-area to struggle against the global crisis later on in the next month European Council has endorsed it. The objectives of EERP4 were to mitigate threatens of the recession in short-term by speedily interesting the demand, improving consumer’s confidence, and decreasing the human cost of the euro-area under the present financial downturn and it also encourages the measures required to strengthen the Europe’s competitiveness in intermediate and long-term in the course of structural reform and elegant investment. SWUKBO (2008) mentioned that the European Commission has allocated a budgetary inclination of total € 200 billion, which consist of € 170 billion from member countries and € 30 billion from the EU budget and it is approximately 1.2% of EU GDP, which has granted, with view of budgetary incentives to overcome the recessionary impact. EERP has followed the following instruments to gain its objectives:
- To use budgetary support to inject of purchasing power under the economy in timely, temporary, coordination to the targeted group;
- To sets out a structural coordination on national budgetary measures with a mix revenue and expenditure instruments;
- To support demand in the short-run measures should conducted surrounded by the stability and Growth Pact,
- Targeted measures required to be pinpointing vulnerable among the populations as well as sectors to promote resilience.
EC (2009) argued that overcome the global recessionary impacts it would require the collective action for alteration of global financial regulation and management, to stabilise the global economy, as well as strengthening the worldwide financial institutions and to renovate confidence where the global leaders showed would work together to conquer the crisis and restore confidence.
Evidence of trade impact of Euro
Baldwin et al (2008) mentioned that the alternative to the classical Mundellian point of view has anticipated by Baldwin and Taglioni (2004) and titled as newly-trade goods hypothesis that demonstrates the empirical findings of euro is working via the ostensible widespread margin of trade. The euro is motivating the export of more fresh goods to a certain extent than just growing the degree of traditional varieties of exports where firms have assorted by their decision to export that engages optimal exports to a euro-area nation and the consequential profits would be adequate to cover the cost of establishing as well as marketing overheads.
EC (2009) pointed out that the EU has confirmed aggressively to the G-20 process of persevere among the significance of financial regulatory and decision-making reform by assist the harmonization among euro zone member countries to the open markets, trade and free competition among the members and called for an imperative wrapping up of the WTO. The world trade has elevated apprehension in many states due to trade is the resource of growth to the exacting in developing states when the G-20 approved to allocate US$ 250 billion to remove the lack of trade in euro area.
The process of formulating the Trade Policies
Most of the trade policies initiated by the EU are in the form of trade negotiation or agreement with the other regions or trade blocks. It has called the Association Agreement and it develops through tree step process. The first consideration is the economic support. The second one is whether it requires any trade or economic transformation. Finally, it concluded through political dialogue. As it has described that the trade policies have started by negotiations, here the process of negotiation has addressed as below:
- Take the mandate: before negotiation European Commission need to take the mandate of the member states on the proposal. It present the draft of the negotiation to the member states through the various committees discussed earlier. These committees assess the proposal by its current conditions, possible outcomes and so on. Then it gives the draft mandate, which can draw anytime if adverse situation arises.
- Assess Impact on Sustainability: when the negotiation has started then the EC conduct an assessment test to measures the impact of any deals derived from the agreement on sustainable development. This assessment has not taken to influence the negotiation rather it has done to measure any required reform to prompt the negotiation.
- The task in negotiation: During the negotiation, the officials as director general levels are sitting in the European commission side. The other concerned of EU sit in the various committees to discuss about the progress.
- Post negotiation: After the completion of the negotiations the agreements has achieved then it goes the European Commission for approval. It is exclusively the power of the EC to whether is approves or not. If there are any issues related to any institutions then it deals by the European Parliament.
- Implementation and monitoring: Before signing the agreement, the EU settled two issues related to monitoring the agreement. That is in case of the future disagreement the procedure for dispute settlement and the possibilities to address the highest level for any arising problems. EU’s main interest is to observe the proceedings comply with the conditions of the agreement or not.
The Responsible Bodies for Trade Policy
In this section, this paper tires to identify the authority responsible for formulating the trade policy within the European Union. It also discuss in details of the role and responsibilities of the key persons within the framework of the governing body of EU.
Christian Aid inside European Union Trade Policy (2008) argues that European commission is the only authorize body for raising any trade policy proposal and the representative of the European Commission (EU) in any trade negotiation with the concern party. EC has an organizational structure with a combination of Director General and Commissioner. The Director Generals have appointed by the EC as a normal service holder. However, the Commissioner has a political mandate as their power is like the minister. Each Director General has their predetermined area of work. Here it has mentioned some key Directors General who has an important role trade negotiation.
- DG Trade: DG Trade is responsible for commercial policy and external trade and he is the key in trade negotiation.
- DG Relex: DG Relex is generally responsible for maintaining relations with international organization and it has special responsibility to continue relations with some specific region. Therefore, when trade negotiations take place it has the influence over negotiations.
- DG Development: DG Development has the responsibility for the development programs of EC. It has the special responsibility for development relations with the African region. So trade negotiation proceed with this region it may has the influence.
The European Council (EC) is the decision making body for Foreign and Trade policy. The member of the body comprises of the minister of the capital of the member countries of European Union. EC has the authority to sanction of negotiation and grant the deal. It discusses and makes decision in its regular GAERC (General Affairs and External Relations Committee) meetings how it can aid in the negotiations.
- Article 133 Committee (C133): it is a committee of where the EU members are meeting to discuss about the various trade policies. It has a major influence on EC when negotiating. It suggests the issues discussed in the negotiations. It also list and prepare the minute of the negotiation.
- Regional working groups: it is a group consists of the officials of the EU member states. It formed to follow the trade and commercial policies prevailed in global arena.
- Presidency: it means every member states the role of presidency by rotation. It helps to set the agenda of the meeting before their turn.
European parliament has not that much influence on the trade policies and issues. It also does not have the discussion rules the various committees. However, it has made decision on problem arises from any legal issues in the policies. It may suggest rectifications or totally the reject the policy. Beside this it link with the EC through the trade committee of the parliament.
Major Player behind the Policy Formulation of EU
There are some government oriented; various organisations and other parties are interrelated with fiscal, wage and trade policies, which would discuss below:
Economic and Monetary Unit (EMU)
(European Commission), (European Central Bank):
EMU is stated economic integration based on single or borderless market with several countries, which are also co-ordinating economic and fiscal policies of Euro as single monetary policy all over the world. Euro is already capturing 15% share of the world in GDP in 2005. However, in recent time, most of other new states aim to join the euro on a solid footing. There are three stages in EMU, which are:
- To coordinate economic policies
- To achieve economic union
- To culminate with adoption of Euro.
All members of EMU are from European Union with condition of entry for states wanting to join in EU. There are some requirements need to fulfil to join in EU, like join in EMU, maintaining ERM II to maintain target rate against euro with other currencies.
To achieve the objectives of EMU, there are some main actors leading economic governance, which are:
The European Council
The European Council and Heads of State of member States and president of the Commission are setting main policy orientations as formal status by Single European Act. It is organised in 2000 and every year, it meets at least four times to practice economic, social, and environmental issues.
The Euro Group
Euro Group is coordinating policies of common interest for the member of “Euro- Area” States to cover five key areas in Beijing, Hong Kong, Singapore, and Tokyo, which are:
- Search and Recruitment
- Events and Conferencing
- Advisory Investment Strategies
- Food and Beverages (Euro Group, 2008).
The Member States
Member States of European Union, coordination of 27 countries, is setting national budgets to limit for deficit, debt, and structural policies for the involvement with labour, capital markets, pensions etc. It has begun with six successive countries enlarging on 2004.
The European Commission
It is an independent of national governments for monitoring performance and compliances according to interest of EU. EC is also implementing decisions of Parliament and Council, like implementing policies, running programmes, and spending funds of European Union.
The European Central Bank (ECB)
ECB is one of the most important central bank worldwide with responsible for setting monitory policies, making price stability as primary objectives to cover 16 member States of Euro Zone.
Exchange Rate Mechanism (ERM II)
ERM II is a system designed to control excessive fluctuations in exchange rates between participating non-euro-area currencies and euro, to hold economic stability within borderless market. Euro area countries must participate in ERM II to adopt Euro for at least two years ((European Commission 2009). ERM II is introduced euro as single currency in 2007 with support of social partners. There are related parties, who support ERM:
- Strategic Council for Economic Development: Strategic Council for Economic Development is adopting ERM II programme for supporting political parties in coalition government (Skledar 2004).
- Economic and Financial Affairs Directorate General (ECFIN): ECFIN is fostering success of EMU both inside and outside for advancing economic policy coordination, conducting economic observation, and providing policy assessment and advice to ensure smooth and efficient application of Stability and Growth Pact. It is also monitoring Member States’ budget policies and economic discipline in stable way in EU internal market (Europa, 2009).
- EU Statistical Office (EUROSTAT): EUROSTAT is providing EU with high quality statistical information services in fiscal and monetary policies (Europa, 2009).
- Internal Market and Services Directorate General (MARKT): MARKT is securing European market integration and removing obstacles to free movement of services and capital establishment to help Union’s citizens and businesses. It has designed and delivered reform economic policies for making Union’s dynamic and competitive economy. In financial services, it is establishing legal framework to create single market of financial area (Europa, 2009).
- Directorate General Employment and Social Affairs (EMPL): EMPL is contributing to develop modern, innovative, and sustainable European Social Model to gain more and better jobs in an inclusive society, which has equal opportunities. It is also promoting positive interaction among economic, social and employment policies (Europa, 2009).
EuroTeam: (European Commission)
European Commission has created Euro Team in 2006 to maintain public interests in EMU and the Euro in the countries, which has joined in EU in 2004 as future agreement to join euro area.
Other International Financial and Monetary System Organisations
For using euro in widespread, there are many international financial and monetary system organisations in worldwide, some of them are: (European Commission 2009):
- International Debt Market: In world market, euro has tremendously used in issuance of government and corporate debt. Therefore, from 2006, euro used in international debt market, which is one third of world market, 44% more comparing with US market.
- Global Banks: Global banks are determining significant medium of loan by euro worldwide.
- Foreign Exchange Markets: As euro is most traded currency, so foreign exchange markets are using euro 40% in daily transactions;
- International Trade: Euro is using extensively in invoice and payment of international trade in present days, in not only euro area, but also non-euro-area and other third countries.
- Global Foreign Exchange: Now euro is using as an important reserve currency in emergencies of monetary needs. For this reason, global foreign exchange companies are holding euro more than 18% in 2006 compared with 1999. Developing countries are holding more Euros than other countries to increase their monetary reserve.
The Actors of Formulating Fiscal Policy in EU
In European Union, the European Central Bank under the Union the Monetary and Economic Union is responsible for the monetary policy. Fiscal policy is a matter of the individual state government and ECB can influence but cannot control it. In the treaty, there are tow financial obligation that member country must meet. The first on is to promote financial development and the last one is the maintain price stability. Ardy B. mentions that The ECB has the responsibility to monitor these two issues regarding the controlling mechanism of the fiscal policy of the member states. The main tools of ECB to control the fiscal policy of the member state are Stability and Growth Pact.
Stability and Growth Pact
Stability and growth pact contains two controlling device to control the fiscal policy and these two components pointed out in brief in this section.
Surveillance: under the surveillance the member state need to submit report on the progress on their stability program to European Council and Commission. This report has five-year tenure, which includes the objectives to make the government surplus or even close to the surplus. It also mentions the way to achieve the target with in the timeframe, the size of the government debt, the possible future economic development, and the measures taken to attain the objectives or programs. After getting the report, the commission examines the report whether it is consistent with the broad economic and fiscal policy for EU or not. If deviations found then recommendation made to rectify the plan. The commission also monitors the progress year by year.
Excessive Deficit Procedure: It is a more precise tool for tightly control the fiscal policy of the states. If the deficit exceeds the 3 per cent of the GDP except temporary or sudden situation, the restriction of government debt make loose and it be less the 60 per cent of GDP. The commission will recommend to made limit the debt within the aforementioned percentage. The commission also impose penalty if the nations fail to remedy the situations. The central bank also prohibited to extend the credit and purchasing any securities from the local or other markets.
The Central Bank and Fiscal Policy
The credibility of the central bank largely depends on the fiscal policy. Within the good fiscal policy, the State bank and the ECB enhance its credibility in a good extent. Fiscal policy can help the central bank in following ways.
Stability: stability refers to the government’s sensitiveness to financial position. If the deficit is high and the inflations are gone up then the central banks policy to rescue from the situation is undermined. Therefore, the role of central bank is weakening. ECB is an independent bank not related to any state. As a result, it cannot implement deficit-minimizing measures to control the state.
Sustainability: Sustainability means the government’s ability to meet the obligation on a long-term basis. To guide and maintain this sustainability the ECB develop the tools to control the govt. debt and deficit.
Stabilization: it is a method of using fiscal policy as a monetary policy to achieve the price stability, social development, and economic growth by EMU. The main aim of monetary policy of the ECB is price stabilization. Without any independent fiscal policy, ECB largely depends on the fiscal stability of the member states for monetary stabilization.
Relationship among the EU members
Economic and Monetary Union has advanced the relationship among the EU members based on economic integration, which is further attempting to introduce a single market. All the members of EU are interrelated with the operation of implication and introduction of euro. Move on to the transitional moment of local currency to euro many countries are facing problems. To solve the problem they have to rely on various newly established institutions and policies. These local institutions and the European Union have to work along with each other for the successful implementations of euro.
Institutions of EU
The responsible institutions in case of implementation and introduction of euro are The European Parliament, The Council, The European Economic, and Social Committee, The committee of the Regions and The European Central Bank. In the national level, the related institutions are the Government, The central banks of the member states and some other related ministries. According to the annual statement on the euro area (2009) the financial institutions related with the implication and introductions of euro are effected the financial crisis of the past few years which are keeping pressure on the relationship between the national level and EU about monetary decision. All members are fighting to get rid of the situation. In this situation, European Union along with the Economic and Monetary Union is helping the members (EC 2009).
EU and National level responsibility sharing
Both the EU and national level institutes share the responsibilities regarding the institutional as well as policy functions with some structured approach. In case of responsibilities, European Union is a summation of some key institutions like European Commission, The Council of the EU, European parliament, Economic and social Committee, Committee of the Regions, European Council, and European Court of Justice and European Court of Auditors (Schumann 2009). The European Union is responsible for decisions consisting the customs union, internal market, joint agricultural policies, environmental policies, economic and monetary policies and so on. All the institutions comprise under a large policy based EU principals where EMU is the institution responsible for monetary and economic decisions (ECB, 2009). Here is a structural presentation of the responsible bodies:
In the national level, the parties related with EU are the governments of the member state, central parliaments, parties, associations and the population. Besides these, there are some sub-national institutions like local administration, sub national government, local parliaments, parties occupies in the national politics, and the associations associated with the national interests (Schumann 2009).
The responsibilities coordinated within the EU and National level sketched as a diagram below:
From the above illustration, it is clear that the institutions and policy makers of sub national level represents in the national level and in some extent in the EU level. However, the EMU here is making decision regarding binding the sub national institutions. Thus, the responsibilities of the sub national institutions allocate as a form of participation and representation. The sub national institutions takes part in the decision making process of the national level, which are the prime responsibility sharing of the local government. The Institution of EU named committee of the regions are largely consists of such sub national institutions. Sub national governments represent the national government in that institution and associations of sub national level represents the nation in the Economic and social committee.
The national level has much responsibility than the locals. The EU level responsibilities have demonstrated by the national level. For example, the laws established by the EU will bind along with the relative laws of the central governments of all member countries. Again, the decisions attained by the EU level are actually the reflection of the decision made by the national institutions. However, it is not easy to find the national level properly because of some dilemmas. Firstly, the political image of all the 27 member countries are different and the government system is differentiated the responsibilities are also differs from country to country. Secondly, the process of systemisation of these responsibilities to make it same for all country is difficult. Thirdly, responsibility management in sub national level is difficult as there is also difference within the sub national institutions (Schumann 2009). The determining factors and the responsibility allocation with EU have sketched below.
The responsibility sharing between the Council of the European Union and the national level has mainly performed by the National government. The CEU 5 is the central unit of decision-making, which comprises the ministers of the member countries. The responsibilities of the ministers are to make the decisions and passing laws. The commission and the European Parliament propose these laws (Schumann 2009).
The responsibilities of the European Commission is also depend on the national governments along with the help of the European Parliament, the governments of the member countries are responsible to design the commission and select the members of the commission. The 27 members of the commission are largely responsible for four major head. These are making proposals for developing policies; act as the guardian of the treaties, performing executive authorities and external representation.
Finally, the national level and the EU are interrelated with the European Parliament, which is mainly representing the all citizens of Europe. The European citizens elect the 732 plenary Members of European Parliament (MEP).
EMU and the national level
In case of the financial policies, all these institutions are allocating their responsibilities according to these complex responsibility-sharing theories. This decision-making process would demonstrate by the financial institutions of EU, which is mainly the EMU. According the above sharing of decision-making responsibility among the EU and the countries, the EMU is striving for an economic and monetary integration in EU. The decision regarding establishing a common market is also depends on the decision of national level. The responsible entities of national level are working accordingly with EMU to establish a common currency euro, for the members of EU, which made by the Maastricht treaty of 1992. The economic and financial parameters of EMU are largely administer and occupied by the responsibilities of some national institutions such as the interest rate, prediction of the inflation rate and many more. The accountability allocation among the EMU and the national level becomes clear if the activities of the main actors of the EMU are drawn. The EMU decides the policies for the countries, which suggested by the national institutions such as designing main policies, adopting euro, deciding on common interest, designing budgets, monitoring and setting monetary policies (ECB 2009).
The European Monetary Union (EMU) started its journey under European Union (EU) to create an economic integration in the whole Europe. The main objective of this integration is to achieve economic and trade benefit within the region. The other objective is to creating a free trade and fair Labour market for the European nation, which will ensure the expected living standard for the citizens. Another achievement is introducing a single currency for the member nations named Euro. However, the unpredicted economic downturn of 2008 has created the whole process sluggish and increase the crisis. To rescue from the situation, the policymakers of the EMU are involving their highest effort to formulate policy that would best fitted with the situation
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1 European System of Central Banks
4 European Economic Recovery Plan
5 Council of the European Union