Economic policy co-ordination in EMU
Stefan Auwärter


Economic and monetary union (EMU) will link the economies of the euro-area Member States more closely together. They will share a single monetary policy and exchange rate. Interdependence with non-participating Member States will also be strong; the single market encompasses all members. Economic policies remain, however, a national responsibility, subject to the provisions of the Treaty and the Stability and Growth Pact. National developments can influence common monetary conditions and spill over onto the Community at large. In view of this, awareness has been sharpened that a successful EMU rests not only on its stability-oriented framework, but also on due policy co-ordination under the economic pillar.

This is why the Amsterdam European Council invited the Council of ministers of economic and financial affairs (Ecofin) and the Commission to examine the issue of enhanced co-ordination of economic policies. The Ecofin council submitted a report to the December Luxembourg Council, on the basis of which the Luxembourg "Resolution of the European Council on Economic Policy Co-ordination in Stage 3 of EMU and on Treaty Articles 109 and 109b" was adopted. The last two items will not be dealt with here. They cover specific issues related to monetary policy and external aspects of EMU.

This contribution first describes the gradual development of economic policy co-ordination in the European Community. Second, the reasons for and goals of policy co-ordination in EMU are presented. Third, the salient features of the Luxembourg resolution are looked at, and, fourth, more specifically some light is shed on the major institutional novelty, i.e. the euro council.


The Treaty of Rome already contained clauses on economic policy co-ordination, but the focus then was on the customs union and the common agricultural policy. For economic co-ordination the Treaty established a strong role for the Member States. It did not elaborate on policy content, the institutional framework or procedures. Developments were gradual and various committees for macroeconomic co-ordination were set up by council decisions in the sixties. But given the fixed exchange rate system and the favourable macroeconomic trends, there was no desire to push for more.

This changed in the late sixties with the emergence of inflationary tensions, diverging economic performance and policies. In order to safeguard what had been achieved, like the common market and fixed parities, attempts were made to strengthen co-ordination and the first plans to create EMU emerged, e.g. the Werner plan of 1970. The currency "snake" was created in 1972 and council decisions upgraded the role of the Commission in co-ordination and streamlined the set of committees serving this purpose in 1974. Nevertheless, co-ordination was not a major success and the process towards EMU lost momentum, owing to conflicting policy views in Member States and divergent policy responses to the shocks of the period.

A fresh start was made in 1979 with the European monetary system as a reply to an unstable international environment. Co-ordination now centred more on the self imposed discipline of national policies in a setting of fixed exchange rates, underpinned by an emerging policy consensus on stability-oriented policies and facilitated by generally favourable macroeconomic trends. The EMU project was revived; the Delors report was approved in 1989 and the subsequent intergovernmental conference took into account the desire to strengthen co-ordination. The Maastricht Treaty provides the economic policy architecture of EMU, mainly in the recast title VI on economic and monetary policy. Here the basic rules are set and institutional provisions made, concerning the roles of Ecofin, the European central bank (ECB) and the Commission.

The key articles are 102a-105. The fundamental challenge of co-ordination is spelled out in article 102a. Economic policies are ultimately, unless the Treaty specifies differently, the responsibility of Member States, but they conduct these policies with a view to the achievement of Community objectives. Therefore, article 103 stipulates that Member States regard their economic policies as a matter of common concern and co-ordinate them within the Ecofin council. The major tool to this end is the annual Broad Guidelines of the Economic Policies of the Member States and of the Community. These guidelines are the point of reference for multilateral surveillance, a process of monitoring, analysing and assessing the economic situation and policies. Articles 104104c concern the public finances and establish rules of budgetary prudence. Article 105 states the goals of monetary policy.

Secondary legislation has been added. A prominent example is the Stability and Growth Pact that mandates sound public finances with an underlying budgetary position of close to balance or in surplus. Furthermore, the Amsterdam Treaty adds another instrument for co-ordination in its new employment title with the employment guidelines.

In the following, the term co-ordination is used in a broad sense that encompasses the various facets of this process. It includes the basics like forwarding of information, frank exchanges of views and sharing analyses. It contains the full application of the instruments provided for in the Treaty, like guidelines for economic policies and policy recommendations to individual countries when required. Finally, co-ordination also comprises the possibility of common action, like the implementation of joint policies in the light of a shared objective, e.g. in the macroeconomic field, or like the approximation of policies in particular areas, e.g. as regards structural policies.


Member States participating in EMU share a common currency and a single monetary policy. Economic trends and economic policies anywhere in the euro area affect the entire region, over and above the effects of the integration of European economies already prevalent, insofar as they impact on inflation prospects and affect ECB actions or financial market perceptions. In short, there is a direct spill-over on common interest and exchange rates. The Treaty already requires Member States to regard their economic policies as a matter of common concern and to co-ordinate them. With EMU, the desire and need for multilateral surveillance and policy co-ordination are enhanced.

Macroeconomic aspects

EMU combines a centralised monetary policy under the responsibility of the European system of central banks (ESCB) with decentralised budgetary policies under national authority, subject to strict rules on budgetary discipline to avoid conflicts with monetary policy, and decentralised wage bargaining by autonomous social partners. In principle, this provides for a clear assignment of policy responsibilities.

In this set-up, the resulting euro-wide macroeconomic policy-mix is likely to be sound and well balanced. Incentives for budgetary prudence coincide with enhanced conditions for appropriate wage trends in view of the stability framework and the absence of intra-EMU exchange rates. Overall, this will allow monetary and financial conditions that are favourable to sustained growth of investment, economic activity and employment.

Nevertheless, since the overall policy-mix is the outcome of decentralised action in important areas, there is a well established case for co-ordination, for common monitoring, assessing and, if necessary, action.

In the budgetary field, the challenge is to provide for an adequate degree of discipline, autonomy and co-ordination of national policies. The Stability and Growth Pact fully addresses the first two of these concerns, and it contains some provisions concerning co-ordination. Normally, the rigorous surveillance of the stability programmes will provide for a sufficient degree of budgetary co-ordination. However, in some instances more might be required. For instance, co-ordinated action could be desirable if there were a risk of overheating, simultaneous budgetary tightening could alleviate the need for higher interest rates. Similarly, co-ordination might be warranted also in the case of certain economic shocks. Discretionary action, using the room created by sound underlying budgetary positions, in the case of a severe downturn is also possible. However, co-ordination is not a vehicle for budgetary fine-tuning and care should be taken to avoid the traditional pitfalls of discretionary action taken in the past, e.g. of permanently increasing the share of government expenditure in GDP.

As regards wages, the challenge is that aggregate trends must be compatible with the objective of price stability, otherwise euro-wide monetary conditions become less favourable to growth and employment. Furthermore, with the single currency it is even more essential that national wage trends take appropriate account of the developments in productivity, investment profitability and competitiveness in order to safeguard employment. While the framework and the incentives are set accordingly, it is nevertheless imperative to closely monitor wage and cost trends with a view to providing early warnings of developments which, if allowed to persist, could be detrimental to the economy and jobs.

Structural policies

The Amsterdam resolution on "Growth and Employment" calls for co-ordination of structural policies. Indeed, there is great potential for economic spill-over. Successful structural policies enhance competitiveness, growth potential and job-creation. It seems obvious to seek to learn from positive experience or good practice and to avoid mistakes. This requires that special attention be paid to structural developments, in full respect of the principle of subsidiarity. The degree of co-ordination ranges from monitoring, exchange of views on best practices in many areas to joint policies in some other areas.


In its resolution, the European Council reviews co-ordination in EMU and provides guidance for its implementation. The document first confirms the rationale for co-ordination in the euro area. National developments can impact on inflation prospects and thereby influence common monetary conditions. Co-ordination is not, however, restricted to the euro area. Given that interdependence is also strong with non participating Member States, via the single market, in view of further convergence and due to their expected participation in the new ERM, all Member States are included in the co-ordination process.

In distinguishing between (non)participants, the Council acknowledges that EMU makes a difference for the links between economies and that the common currency is the basic reason for enhanced co-ordination. At the same time, the perspective of expanding the euro area is invoked by the reference to ERM 2 on which agreement was finalised in Amsterdam. One of its purposes is to help adopt the euro.

The resolution next points to the wide range of topics covered by co-ordination. It encompasses macroeconomic developments, including cost and price trends, budgetary policies and structural policies in labour, product and services markets, and, more specifically, the fostering of tax reform and the discouragement of harmful tax competition. While co-ordination deals with this vast array of subjects, it must do so in respect of subsidiarity and the policy assignments and prerogatives established in the Treaty.

The long list of examples of what is subject to co-ordination illustrates the wide practical consequences of the principle of enhanced co-ordination. Notwithstanding the commitment to the common cause, the Member States, by pointing to the legal framework, also remind of national competence for policies.

The resolution then turns to the instruments for co-ordination. Their full and effective use is necessary to ensure a smooth functioning of EMU. The first in line are the Broad Economic Policy Guidelines. They will be developed further to ensure sustained convergence and may provide more country-specific guidelines. More attention will henceforth be paid to employment, via the growth potential and via structural measures to increase employment friendliness.

Here the Luxembourg resolution underlines the important role of the Broad Guidelines and thus confirms the Amsterdam resolution on "Growth and Employment" that already widened the mandate for the Broad Guidelines and suggested a shift in emphasis in their contents. To a certain extent this is a consequence of their success in advancing nominal convergence.

Next the resolution underlines that successful co-ordination requires compliance with the Treaty, with the rules set in secondary legislation and with the guidelines. It is the role of multilateral surveillance to secure this. Important parts of the process are monitoring and early warning, to be given particularly in case of worrying developments in public finances and in wage trends. Recommendations to the Member State concerned are apt to serve this purpose.

Here the Council acknowledges the important role of the modalities of enhanced co-ordination in EMU. So far, Ecofin has not addressed a recommendation to a Member State according to article 103. The European Council encourages it to do so if necessary, in the context of the Stability and Growth Pact and more generally.

Finally, the Council in its resolution invites the Ecofin council to regularly discuss co-ordination issues at its informal gatherings and to foster open and frank debate by meeting occasionally in restricted sessions, particularly when conducting multilateral surveillance.

The European Council thus concurs with the plans of the Ecofin council on institutional arrangements to increase its efficiency in co-ordinating. In its report to the Council, Ecofin also suggests streamlining its procedures by establishing a full-year cycle of surveillance.

A specific institutional issue settled in Luxembourg concerns the Ecofin council. This council is the centre of co-ordination and the sole council empowered to act in the relevant areas, particularly with a view to the main instrument of co-ordination, the Broad Guidelines. This notwithstanding, the Heads of State or Government agreed that ministers of participating states may meet informally amongst themselves to discuss issues linked to their shared specific responsibilities for the euro. The Commission and, when appropriate, the ECB, participate. This informal euro council might deal with the economic situation and policies in participating countries or the exchange rate of the euro, with a view to preparing discussions in other fora.

The reason why the debate about this informal council lasted through much of the second half of 1997 and was settled only in Luxembourg rests with diverging interests. The participating countries have a legitimate interest in discussing some issues amongst themselves, in particular on euro exchange rate matters. The pre-ins saw the danger of a split, of being left outside even though in most areas the economic interests of all Member States are shared and common.

Given the specific shared responsibilities of the participating Member States, the best way forward is indeed to frankly acknowledge the differences between ins and pre-ins while at the same time the utmost is done to avoid a rift and ensure cohesion among all Member States. Arrangements to this end include, first, the presence of the Commission in the euro group as a guardian of the Community interest; its presence also facilitates consistency and coherence with the work done in the Ecofin council. Second, whenever matters of common interest are concerned, they are discussed amongst all ministers. And finally, formal decisions, whatever the Treaty foresees on the right to vote, are in all cases taken by the Ecofin council.



27-03-1998 Administrator, Directorate General for Economic and Financial Affairs. Substantial guidance and comments by Servaas Deroose are gratefully acknowledged. The usual disclaimer applies.