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Wage and price flexibility, and the structural and institutional reforms required to induce this kind of flexibility, have now become the leading economic issue in Europe. This is not a new development. It has long been argued that structural reforms were a necessary condition for a successful monetary union (Delors, 1989). Nor has this gone unrecognised within Europe itself. The Lisbon Agenda, agreed in 2000, was introduced precisely to create greater market flexibility. [ABSTRACT FROM AUTHOR]

In this chapter, we aim at analysing and evaluating the macroeconomic effects of structural policy measures and of policies of budgetary consolidation. For the former, we build upon the results obtained in Chapter 5 regarding the spillovers from economic reforms that close the efficiency gap between the Euro Area and the US. For the latter, we start from the fact that at present, several Euro Area (and other EU) countries have difficulties in fulfilling the deficit and debt criteria of the Stability and Growth Pact and try to consolidate their budgets. In Chapters 3 and 4, empirical estimates of the spillovers from budgetary policies that increase the surplus of the public budget were provided. Here we will use the MSG3 Model, the most recent version of the McKibbin-Sachs Global Model, to simulate policies which we consider to be feasible (see the Appendix to this chapter, for more information on this model). First, we consider structural and budgetary policies separately, and then we combine both of them. Both isolated (non-coordinated) policy actions of one country only and coordinated (joint) Euro Area policies will be investigated. We will concentrate on isolated policies by Germany and Italy only; effects for France are between these two, and spillovers for a small economy are negligible. In order to arrive at policy recommendations, we will also provide some tentative welfare calculations comparing different scenarios. [ABSTRACT FROM AUTHOR]

The effect of fiscal expansions on interest rates has commanded enormous theoretical interest, but the hypothesis of crowding out has received only some — albeit not very robust — empirical endorsement. Most economists would nevertheless agree with the position that consolidating public finances reduces pressure on long-term interest rates and will be conducive to economic growth in the long run by stimulating private investment (Gale and Orszag, 2003). The crowding out premise is also an important motivation for the consolidation of public finances, as is evident from the policies advocated by both the European Commission and the European Central Bank. [ABSTRACT FROM AUTHOR]

In March 2000, the heads of the European Union countries proclaimed the aim of making Europe the "most competitive and dynamic knowledge-based economy in the world, capable of sustaining economic growth with more and better jobs and greater social cohesion" by 2010. To achieve this overall goal, a set of economic and social reforms called the "Lisbon Strategy" or the "Lisbon Agenda" to be undertaken was defined. Several objectives, grouped in five dimensions (employment, innovation and research, structural economic reforms, social cohesion, environment) were set up. It was agreed upon that the European Commission should annually prepare progress reports in order to evaluate the progress the Member States have made in achieving the Lisbon goals. In its mid-term review in 2005, the European Commission concluded that the implementation of reforms in line with the Lisbon Strategy had in many areas been too slow. In particular, the growth performance of the past five years had been disappointing, particularly as compared to other regions of the world economy such as the US and certain Asian economies. Therefore, the Lisbon Strategy was revised, focussing on growth and the creation of employment (European Commission, 2005 and 2006). [ABSTRACT FROM AUTHOR]

In this chapter we look into the interaction between the level of government debt and the effects of fiscal policy on private consumption in a number of EU-15 countries. Hence, the chapter somewhat deviates from other chapters in the book: We do not focus on economic spillovers between countries, but remain within the country borders. The questions we address are nonetheless valuable ones to evaluate policy coordination. If the transmission of fiscal policy actions depends on the debt level, a common EU-wide fiscal action will differently affect the individual Member States. Or put differently, to achieve a common goal different actions are needed. In addition, a common fiscal target, such as the Maastricht deficit criterion, might be harder to achieve in a country with a higher or lower initial government debt level. On the other hand, dependence of fiscal transmission on the debt level might also be seen as an additional rationale for the debt convergence criterion. [ABSTRACT FROM AUTHOR]

In Chapter 1, it was discussed in detail that there are various spillovers in a highly integrated economic space like the Euro Area. It was explained in which ways these spillovers manifest themselves in the Euro Area e.g. through trade flows, pass-through of inflation, adjustments caused by changes of the common short-term interest rate and the exchange rate of the euro. It was also noted that there exist several spillover effects from monetary and fiscal policies in a highly integrated monetary union like the Euro Area. Monetary and fiscal policies in the Euro Area are intrinsically linked through these spillovers. In the short run, spillovers arise from the effects that monetary policy may have on the macroeconomic conditions under which fiscal policies are undertaken, and vice versa. In the long run, these spillovers/interdependencies arise in particular from the accumulation of government debt. [ABSTRACT FROM AUTHOR]

Macroeconomic policymaking in the European Union's Economic and Monetary Union (EMU) is characterised by an asymmetric division of competences: While monetary policy is conducted centrally by the European System of Central Banks and the European Central Bank (ECB) in particular, structural and fiscal policies remain under the responsibility of the individual Member States, but they are subject to intensive consultation and multilateral surveillance. Article 99 of the EC Treaty calls on Member States to regard their economic policies as a matter of common concern and to coordinate them in the Council, with a view to achieving, inter alia, higher non-inflationary growth and a better standard of living. [ABSTRACT FROM AUTHOR]