The impact of EMU enlargement on structural reforms: A public choice approach
The impact of EMU enlargement on structural reforms: A public choice approach
Saturday, 6 April 2013: 9:10 AM
The theoretical literature dealing with the impact of the EMU on the incentives to implement structural reforms is ambiguous. In the context of EMU enlargement, the extension of the ECB council to new members and the governors incentives to favour their national interest, make the ECB monetary policy less predictable. For some observers, such uncertainty is beneficial because it leads governments to realize the loss of monetary policy as an alternative adjustment instrument in response to economic shocks and incite them to implement politically undesirable structural reforms (Hefeker [2011][1]). However, such a result is compromised if one takes into account the influence of national pressure groups who oppose the reform as well as the interactions between pressure groups, the ECB and national governments. Such a Public Choice perspective to analyse the impact of EMU on structural reforms implementation is justified on two grounds. First, although the independence statute of the ECB makes it less vulnerable to pressure groups influence, most national governors in the ECB Council depend on their governments for reappointments (Vaubel [2003][2]). Second, the high diversity of the council and the regional bias phenomenon is a favourable context for such influences. Using the political agency framework developed by Jennings [2011][3] that provides a rational choice analysis of populism, we seek to analyze the impact of such interactions on the prospect for structural reforms. The theoretical results would also suggest challenging explanations to recent empirical evidences about the effect of EMU on structural reforms (Duval and Elmeskov [2006][4] ; Alesina et al. [2008][5]).
[1] Hefeker C. [2011], “Policy Uncertainty and Economic Reforms in a Monetary Union”, German Economic Review, 12(3), p274-285.
[2]Vaubel R. [2003] “The Future of the Euro: A Public Choice Perspective.” In F. H. Capie and G. E. Wood (eds.) Monetary Unions: Theory, History, Public Choice, 146–81. London: Routledge.
[3] Jennings C. [2011], “ The good, the bad and the populist: a model of political agency with emotional voters,” European Journal of Political Economy, 27, pp. 611-624.
[4] Duval, R. and J. Elmeskov [2006], “The Effects of EMU on Structural Reforms in Labour and Product Markets”, ECB Working Paper, No. 596.
[5] Alesina, A., Ardagna, S. and V. Galasso [2008], “The Euro and Structural Reforms”, NBER Working Paper Series, No.14479.