The case for adapting the policy framework in the euro area

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Maintaining a learning mindset and showing willingness to adapt the policy framework of European monetary union is “crucial” to the euro’s long-term success, according to a January report from Bruegel.

With inflation above three percent, growth slowing, financial market turbulence widespread and the euro appreciating to “record levels” against other major currencies, the report’s authors explore whether the euro area is equipped to deal with the less favourable economic situation and recommend changes to policies and policymaking. 

The authors express their disappointment that efforts to reform European monetary union (EMU) have not accelerated and speculate that the single currency may have “insulated” its members from crises and thus slowed down reform. Moreover, the report describes “uneven” economic performance across the euro zone, meaning that asymmetric shocks remain a risk. 

Regarding enlargement, the authors call for a reinterpretation of the criteria for joining the euro to take “economic realities” into account. 

The Bruegel report suggests four conditions that the EMU framework should fulfil: First, it should deliver stability; second, it should set out “clear and transparent rules” governing behaviour to “ensure predictability”; third, it should provide incentives for policies that are desirable from both national and European perspectives; and fourth, it should be able to adapt according to experience and global change. 

It argues that the European Central Bank (ECB) should introduce an inflation target regime and integrate its economic and monetary analyses into a single framework, while adopting a “flexible” approach to inflation targets. 

Moreover, the ECB should seek the endorsement of the Eurogroup for its targets to garner more public support, believe the authors. 

Debt sustainability should be the main focus of the ECB’s surveillance rather than deficit as this is more important for EMU’s partners, argues the report, calling for increased fiscal autonomy at national level for those countries with effective national policy rules. The ECB could do this by defining minimal requirements, it adds. 

Finally, the Bruegel report calls for the euro area to express its views more forcibly on the exchange rate policies of its global partners and stresses the importance of speaking with one voice on such matters. 

The authors conclude that “the return on the major investment made by the creators of the European currency will be determined by the ability of all participants to learn from experience and improve.” 

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