(1) Monetary Union v. Economic Union Does EMU mean “European Monetary Union” or “Economic and Monetary Union”? The relationship between the Monetary Union and the Economic one is asymmetrical. According to the EC Treaty, the Monetary Union means the European System of Central Banks (ESCB) which is the one single decision-making centre in the monetary field. On the other hand, in the Economic Union, the ultimate decision in the fiscal and budgetary field remains in the hands of the Member States and they monitor their economic policies mutually in the Econmics and Finance Council (ECOFIN) through the multilateral monitoring procedure and the excessive deficit procedure, reinforced by the Stability and Growth Pact. (2) ECB v. ECOFIN The foreign exchange rate policy belongs exlcusively to EMU. Article 111 [ex. 109] (1) stipulates that ECOFIN has the power to conclude formal agreements on an exchange rate system for the Euro in relation to non-Community currencies. However, under the floating exchange rate system, ECOFIN may only formulate “general orientations” for the exchange rate policy to those currencies. It means that the primary objective of ESCB to maintain price stability has priority over “genaral orientations”, which seem not to be legally binding. (3) “Ins” v. “Outs” Even the non-participating Member States in the Euro participate partially in ESCB, because these countries are members of the General Council, and they have the obligation to achieve the independence of each national central bank (NCB), with the exception of the UK. (4) ECB v. NCBs ECB decides monetary policies and NCBs implement them. This reflects centralisation. But the other elements indicate that ESCB has a decentralised structure. First of all, the govenors of NCBs are members of the Governing Council, in which each of them has one vote, in addtion to the members of the Executive Board, and decision-making is in principle by simple majority. Secondly, NCBs may perform functions other than those in the ESCB Statute in so far as they interfere with the objectives and tasks of ESCB.
A single monetary policy for the European countries adopting the Euro will be launched by the ESCB from the beginning of 1999. Technical preparations for supplying and managing the Euro have already been finalised. The ESCB was established in June 1998, and so were its decision-making bodies as well as its cross-border settlement system (TARGET). The EMI, paving the way for the ESCB, has already defined: (1) the primary objective (price stability); (2) the strategy (a flexible mixture of the monetary targeting and direct inflation targeting); and (3) the instruments (open market operations, standing facility and minimum reserves. Open market operations will be the main pillar). However, there are three reasons why the single monetary policy is going to be a challenging right from the outset. The first is that the demand for the Euro could temporarily be unstable during its introduction process, making it difficult for the ECB to pursue its strategy. However, this is an inevitable process for monetary integration and could technically be over-come as time passes. The second is that the transmission mechanisms of the single monetary policy may differ from region to region, due mainly to the structural differences in historically formed financial systems. In this respect, the EU countries could be divided into three groups: German-central Europe; France-Latin; and UK-Nordic. Although little is known about differences, among these regions, in terms of magnitude and speed of the monetary transmission process, the ESCB has to fix the single interest rate throughout the Euro area. No one knows exactly whether this will cause a practical problem or not, but if it will, structural convergence of the financial system throughout the Euro area could solve the problem over time, although it is not clear how long it would take. The third is that the political situation in the EU has drastically changed since 1997. Presently, 9 out of the 11 Euro area governments are led by centre-left parties. They are introducing growth-orientated Keynesian demand management policies, and which are contrary to the stability-orientated policy set by the ECB and supported by supply-side economics. In practice, these discrepancies in policy stance will have both internal and external consequences. Internally, there will be a dispute on: (1) policy rate, although independence of the ESCB from any government is constitutionally guaranteed; (2) interpretation of the ‘price stability’ in the Treaty, presently defined as 0 to 2% increase in the HICP; and (3) the reconsideration of ‘the Stability and Growth Pact’. Externally, if the ECOFIN are to establish a less flexible exchange rate system vis-a-vis the dollar, such as a target zone, this will be a constraint on the ECB in pursuing its ultimate objective of price stability, creating a situation of ‘internal-eternal dilemma’.
In this paper we especially reconsider the convergence possibilities of long-term interest rates in the EMU member countries. The empirical evidence suggests that relevant convergence criteria in the Treaty and new information-generating and processing techologies have increased the transparency of main financial markets in Europe and so relatively quickly reduced the market segmenting effects of asymmetric information. In consequence, the range of financial transactions between member countries has remarkablely broadened. In the second stage of EMU, EU member countries have realized a general decline in nominal interest rates and interest rate differencials with Germany. However, this performance does not necessarily mean that economic structures of member countries became homogeneous and fiscal policy stances identical. For example, credit risk premia from the long-term interest rates prevailing on EU members debt are still differenciated, as reflecting the credit rating on national public debt set by Standard and Poor's and Moody's. These statistically significant credit risk premia would become even more important after the introduction of the Euro in the third stage of EMU, because exchange rate risk is completely abolished. Considering now the debt ratio to GDP and the present situation of harmonization process of EU tax systems more deeply, we find the following analitical results. First, even in the process of establishing monetary discipline and pursuing stability of price by ECB, there would not emerge the one euro yield curve in the EMU financial markets, because of the possible differences of credit risk on member governments' bonds as well as of fiscal policy stances. The same conclusion can be also confirmed by imcomplete convergence of term-structures of interest rates statistically. The adoption of a single currency, the Euro, would expedite, as generally accepted, the tax harmonization process, because monetary integration inevitablely deepens financial market integration and transparency. But such market-based tax harmonization is limited mainly in the areas of the value-added tax and other sales tax that are exposed to international competition. On the other side, tax harmonization for the income, profits, and capital gains tax and moreover for social security contributions is rather difficult to realize so promtly, because these tax areas are historically connected with social structures of each member countries. Second, a single monetary policy and tax harmonization would emerge eventually the difference of financial autonomy between member countries under the constraint of so-called stability pact. The EMU has two actors: one is the ECB that will set the common monetary policies. Another one is not single, but eleven member governments that will maintain a considerable degree of fiscal autonomy. Coordinating these two actors may be not simple and easy, especially in the case which any external shock falls very unequally on a few high-debted member coutries. High-debt countries would have incentive to decrease their debt ratio to GDP by pursuing prudent fiscal policies, solong the marginal benefit from decreasing debt ratio to GDP is larger than the marginal benefit from a common decrease in the interest rate controlled by ECB.
On January first, 1999, stage III of Emu began. Monetary and fiscal policies in Euroland will be conducted with an eye towards winning the world's confidence in the euro. The Maastricht criteria on debts and deficits have already led to unprecedented spending-cuts and social security reforms in many Member States. The Stability and Growth Pact is expected to Keep the pressure for fiscal prudence. The Maastricht treaty ensures the independence of the ECB, even though other institutions (such as the Euro-11) may also try to influence monetary policymaking in Euroland. Monetary and fiscal tightening, as well as loss of devaluation as a policy tool, should encourage progress in much needed stroctural reforms. For any currency to be widely used and held as a vehicle of financial investment, its market must be deep, liquid and transparent. Here the US dollar has an advantage over the euro. In October the Commission adopted an action plan to create a single market in financial services, although implementation may be deiayed due to objections from France among others. In November, seventeen European nations including the UK, Germany and France ageed to start a unified securities market by 2001. The euro is a new element in a potentially volatile market. The chance of currency market turmoil exists both when the euro is strong and when it is weak. If the markets prefer the euro over the US dollar (due to US current account deficits, for instance) there may be a sudden, massive shift out of the dollar into the euro. If on the other hand, for any reason the confidence in Emu is shaken, the reverse can happen. Neither of these is a prospect to look forward to. That is another reason why doubts have crept into the minds of many as to the virtues of a completely free movement of capital. The importance of the EU is now greater than it ever has been in the post-war era. If the euro is widely accepted, developing nations will no longer have to keep all eggs in the same basket, both in terms of foreign exchange reserves as well as baskets to peg their currencies to. In terms of macro-economic balances, the EU needs to help fill the gaping hole in global demand created by financial collapses around the world. And in terms of economic systems, Europe with a strong financial sector and prosperous economy can be effective as a counter-weight, against global convergence towards a system that is market-oriented in the extreme.
European Union starts the 3rd stage of EMU on January 1999. It will symbolize a grand new epoch for the monetary history, but also will it include so many problems that the European monetary integration may proceed into the negative big bang. Many papers indicate that 3rd stage with EURO has a lot of problems, but they didn't explain the essence of these problems. My paper firstly explains that there is the structural disparity in the EMU process, and tries to offer the concept ‘conditional transformation’ to theorize that disparity. This paper systemizes the 3 elements which make up the structure of monetary integration. The first element is monetary theory. The second one is integrational ideation. The third one is the reality which surrounds the monetary integration. Monetary theory is represented by Optimum Currency Area theory. Integration ideal has changed into the policy concept named convergence criteria. And these two elements seems very similar in its appearance. But actually the characteristics of these two are quite different. OCA criteria are the sufficient condition, and convergence criteria are the necessary condition. These two criteria cannot coincide with each other except in the period when the economy is located in its relative boom. In fact this happened in the latter half of '80s and allowed the coincidence of theory, ideal and economic reality. Maastricht regime could be justified on the feasibility of necessary-sufficient condition of this specific period. But the problem is that this specificity cannot be extended into the general situation. The general disparity in the EMU structure develops into the divergence between the monetary policy and fiscal policy and produces the problem of sustainability. The former is completed regionally in the form of single currency EURO, but the latter is on the most part in the control of national authorities. ERM II or the Stabilization Pact cannot fully support the EMU3 regime in its transition. Because of the primary divergence between the conditions, the Europe-wide adverse economic development, especially asymmetric one, can negatively affect the sustainability of EMU. In this situation the only reference that can sustain this regime is ideal-biased policy. In that context, EMU3 regime's essential problem is how long the integration ideation can suppress the problematique emanated from the structure of the theoretical condition and economic reality before it reaches the perfect political-economic union.
Central bank independence continues to become the global standard for the activities of monetary authorities. Increasing the independence of the central bank is widely acknowledged to decrease inflation by enhancing the credibility of commitments to price stability. This does not create an effect on economic costs in real terms, such as economic growth or employment.In accordance with Article 105 (1) of the Treaty on European Union, the primary objective of the ESCB shall be to maintain price stability. The statutory mandate to aim at price stability will give the ESCB a clear direction for its policy. This idea is rapidly becoming the consensus of academics and policymakers not only in the EU countries, but also all over the world. This paper examines the empirical relationship between central bank independence and the costs of disinflation among the EU countries. Many previous papers suggest that central bank independence has a negative correlation with inflation. Granting greater independence to a central bank associates with lower inflation. However, few papers elucidate the relationship between central bank independence and the costs of disinflation. To investigate the effect of central bank independence on the trade-off parameter, we create estimates for both the EU and the G7. We use various ‘political’ and ‘economic’ indices provided by several papers to gauge central bank independence. The result shows there is a positive correlation between central bank independence and the trade-off parameter in the EU. There are, of course, many other factors that determine output-inflation trade-off or the slope of the Phillips curve, but the clear real cost of disinflation is shown. For the EU countries at least, the growing political independence of central banks may have substantial real effects than in other countries such as those in the G7. However, the evidence of the negative correlation between central bank independence and average rates of inflation shows that the important issue of causality is a negligible factor. There may be a labor market structure that makes reducing inflation more costly. Such factors may increase the value of an independent central bank that maintains low inflation. For example, there may be nominal wage rigidity in the EU. Our empirical evidence suggests that both the incentive to inflate and the costs of reducing inflation may increase with greater central bank independence. Central bank independence delivers lower inflation but with real effects. It is certain that individual countries will have more independent central banks in the near future. Therefore, the problem of disinflation may be a big cost for the EU. The EU unemployment rate is quite high now. That may create many problems for achieving independent central banks.
This paper attempts to examine how the corporate strategy has changed on the Single Market through analyzing dynamics of firm size and industrial concentration. The change in the corporate strategy in adapting for the Single Market is essential to realize the full effect of the Single Market Program (SMP), and thus the importance of such change was emphasized in the Cecchini report. Since changes in firm size and concentration result from the change in the corporate strategy, studies of their latest trends are appropriate for the purpose of this paper. It was expected that significant increase in firm size and concentration as a result of the SMP would occur in industries with high sensitivity to the SMP and with high potential for scale economy. In fact, it is in the industries with both “low sensitivity and low potential” that such increase has occurred since the implementation of the SMP. The cause of this unexpected result is that these firms have taken advantage of an EU-wide market and spread their increasing endogenous fixed costs (e. g. advertising and R & D expenditure) over the Community to benefit from unit cost reduction. Why have endogenous fixed costs increased? This is because the maturity and the competitiveness of the European market required some kind of differentiation strategy that could have been primarily brought about by endogenous fixed costs increase. In such a case, cost reductions would have been sought principally by exploiting the firm-available type of scale economy, as were analyzed in the European Commission's reports. This fact suggests that the growth of firm size may be considered as a competitive weapon. However, the number of firms capable of enlarging their size enough to exploit scale economies is limited. The alternative to this is to specialize in niche markets. And this may well intensify the bipolarization of firm size. Moreover, as the differentiation has advanced, the industrial homogeneity has been destroyed. Business activities have been diversified within the same industry. Particularly, firms have shifted their value adding structure from production-based to design-based one. This shift is the key to restructuring the firm toward more efficient management. These phenomena are remarkable especially in the matured industries which had only limited market opportunities and little possibility for any significant structural change. Yet, the SMP has intensified competition for differentiation and caused a structural change in the matured industries, because it triggered integration of national markets where similar structures of demand and production prevailed. In Europe, the matured industries are relatively important. Therefore their activation can make significant contribution in bringing dynamism to the European economy.
More than five years have passed since the Treaty on European Union came into force and the activities in the field of Justice and Home Affairs were started. During five years, many documents have been adopted and various activities have been carried out in this field, although there have been positive and negative evaluations there of. This article endeavours to make a brief introduction of the activities in the field of EU Justice and Home Affairs with special emphasis on the combat against organized crime, which has also been dealt with in other international fora such as in the United Nations and G8 summit meetings. In examining the EU activities in this field, the following two documents are indispensable: “Council resolution laying down the priorities for cooperation in the field of Justice and Home Affairs for the period from 1 July 1996 to 30 June 1998”; and “Action Plan to combat organized crime”. Conventions, joint actions and joint positions to combat organized crime that have been elaborated or are presently being elaborated could be fully understood if one examines these two fundamental documents. 15 political guidelines and 30 recommendations contained in the Action Plan, as well as priorities laid down by the Council resolution, could roughly be summarized as seeking five basic objectives: (1) obligation to criminalize certain kinds of conduct; (2) controlling the proceeds of crime; (3) enhancement of international cooperation; (4) EU level action, such as strengthening Europol; and (5) promotion of administrative measures. One should also take into account the changes made to the EU and EC mechanisms by the Treaty of Amsterdam, which, when coming into force some time in 1999, will revise considerable provisions in the EU and EC treaties. Bearing the above factors in mind, the activities in the field of EU Justice and Home Affairs with particular emphasis on the combat against organized crime will be discussed in this article.
After the Cold War, Europe's security environment has changed dramatically. The EU has tried to change its common foreign and security policy (CFSP) in the Treaty of Amsterdam, but it did not answer Austria's needs sufficiently. Austria is the only country in the EU that has stated its status of neutrality in its Constitution. The purpose of this paper is, therefore, to examine the prospects for Austria's security policy in Europe through an analysis of various security alternatives for Austria with regard to the CFSP. Firstly this paper tries to analyze how the implementation of the CFSP has been progressing since the Treaty of Maastricht. The Treaty of Amsterdam apparently suggested that the EU will strengthen its links with the WEU and NATO. The paper secondly looks at where the Austrian security policy stands on the issue of neutrality. Before Austria's membership in the EC (EU) Austria stated officially that it fully commits herself to the objectives of the common foreign and security policy of the EU in a spirit of solidarity. In truth Austrian politics is divided into two sides when it comes to security policy. The Austrian Socialist Party (SPÖ) are in favor of Austria's neutrality, while the Austrian People's Party (ÖVP) opts for Austria's full membership in the WEU and NATO. Thirdly the paper looks at the linkage between the EU, the WEU and NATO. Added to this point this paper examines Austria's full membership in the WEU and NATO. Because of its neutrality Austria is currently an observer of the WEU and joins the PfP of NATO. If the importance of the WEU and NATO in the EU increases in the future, it is very difficult for Austria to commit to the CFSP without full membership of the WEU and NATO. Finally the paper tries to speculate on Austria's security policy in the future. As one conclusion it can be said, if the CFSP fails to develop a concrete policy, it is likely that Austria's security policy will remain ambiguous.