The assessment: EMU, four years on

This paper reviews the functioning of the Economic and Monetary Union over the first 4 years of its existence. Monetary policy is viewed as having been of the 'inflation-targeting' type, but with a tendency towards delay and conservatism in adjustment, which may also reflect over-optimistic output growth forecasts. The resulting pressure on the Stability and Growth Pact (SGP) illustrates the weakness in the 'consensus view' of the harmonious interaction of monetary, fiscal, and supply-side policies, which requires policy in all three areas to be 'correct'. In discussing reform of the SGP, a looser but still constraining form of fiscal agreement is advocated. The supply-side and balance-of-payments issues involved in inter-country adjustment also interact importantly with the SGP and are identified as key areas of difficulty in a still 'immature' monetary union, with separate labour-market structures. Here the mechanisms for coordination are more or less absent.