European Monetary and Fiscal Policy

Citation

Richter, C. (2001), "European Monetary and Fiscal Policy", Journal of Economic Studies, Vol. 28 No. 6, pp. 446-450. https://doi.org/10.1108/jes.2001.28.6.446.2

As the title suggests, this textbook is mainly about European monetary economic policy. It presents the Treaty on European Union and the Statute of the European System of Central Banks and the European Central Bank as such with respect to central bank independence and political accountability. European fiscal policy is therefore discussed in terms of the Stability and Growth Pact. In particular, it analyses how the aim of monetary stability is compatible with fiscal policy. It also gives a brief history of the European economic and monetary integration. It is full of useful details and statistics comparing European countries.

The book covers important aspects of the European Monetary Union (EMU), such as the design of European monetary policy, national fiscal policy in the EMU, European fiscal policy, financial market structure in Europe, and international policy co‐ordination.

It is first of all written for second‐ or third‐year undergraduate students. So, we would like to discuss it from this point of view. The first chapter gives a (historical) overview of European monetary integration. As long as this chapter is considered to be an introduction to the problems discussed in the following chapters, it can well be recommended to undergraduate students. The second chapter explains the relationship between the European Central Bank (ECB) and the national central banks within and outside the Euro (but within the EU). Concerning the statutory parts, this chapter gives a good overview about the link of the ECB and the other European Central Banks. However, when it comes to accountability of the ECB and economic policy, quite a lot of recent literature is not mentioned at all (Hughes Hallett and Viegi, 2001; Demertzis et al., 1999).

The following chapters (European monetary policy, national fiscal policy, European fiscal policy, financial integration, and international policy co‐ordination) discuss European monetary union from an economic policy’s point of view. Generally, a book on economic policy is always easy to read and at the same time it is also difficult to read. It is easy because economic policy largely avoids formulas or complicated mathematics. In particular, undergraduate students will be pleased about that. On the other hand, the argument is still based on some theories (which are mathematical). These theories in turn are based on some very important assumptions. These assumptions are not always clarified or sufficiently discussed in the book. That makes the book easy to read but for undergraduate students difficult to understand. Students might not be aware from where the argument is coming. Hence, if they learn simply by heart what the authors are suggesting, they neglect possible shortcomings of the argument and might end up with some very restricted conclusions. An appendix of the most used theories would have been helpful in that respect.

Another aspect concerns the structure of the book. Monetary policy is discussed very early in the book. However, when it comes to monetary instruments, the argument lacks some depth, in particular concerning bonds markets (which are important for open market policy of the Central Bank). This shortcoming is not remedied until chapter six (Financial Integration and Financial Market Structure). First of all, it should have been placed just after the chapter on monetary policy. As the authors correctly point out, financial integration in terms of free capital mobility was a necessary condition for monetary union. However, removing capital barriers is only the starting‐point. The book discusses quite a lot of harmonisation (e.g. tax harmonisation). However, harmonisation of capital markets as such is no topic. Nothing is said about different bond markets characteristics. Although capital is mobile in Europe now, that does not imply that German and UK bonds, for example, are perfect substitutes, because most of them are simply not directly comparable. To be fair to the authors, this is a topic of ongoing research. So no final conclusion has been reached yet. Still, this issue should have been mentioned, at least.

In summary, this book gives a good description of several institutions of the EU and its policies. When it comes to economic policy, some caution is recommended, in terms both of using the book for teaching and of its policy implications.