Convergence in EMU: What and How?

Tasks

Convergence between Member States is one of the key goals of the European Union and has been at the centre of many recent policy proposals. This project assesses convergence within the Economic and Monetary Union and analyses current reform proposals. Against this background, we first strive to identify the types of convergence that are pivotal for the well-functioning of the euro area and depict their development over time. Based on these findings, we evaluate policy initiatives aiming to foster economic convergence and discuss them in the context of the EMU’s governance framework, with a particular focus on the design of the recently proposed reform delivery tool.

Results

Focusing on real, nominal and cyclical convergence, the analysis presents important indicators and discusses their development across time and countries. In particular, a successful design and transmission of a common monetary policy is greatly facilitated if members of a currency union are at similar stages of their business cycles. Likewise, a certain degree of nominal convergence is crucial for a well-functioning of a monetary union, but full convergence would not be economically justified. Real convergence as such is not required for a functioning monetary union, but constitutes an important objective of the EMU by itself and may foster cohesion and political acceptance of the EMU. In the existing institutional setup, economic convergence depends mostly on the policies of the member states. While the European Semester aims to coordinate national policies, the proposed measures are oftentimes inadequately implemented by the Member States.

In this context, we assess the recently-proposed reform delivery tool, which aims to incentivise governments to conduct growth-enhancing structural reforms by means of fiscal transfers. Acknowledging the importance of national ownership, giving member states the opportunity to submit reform proposals, and requiring detailed implementation milestones all go in the right direction. However, the disbursement of funds should not only depend on the implementation of the agreed reforms, but also on achieving output convergence targets. Moreover, available resources should be used more effectively in promoting economic convergence.

We subsequently present our proposal of ‘national convergence roadmaps’ which serves as a blueprint for the reform delivery tool. Our proposal aims to strengthen the role of national responsibility for the convergence progress by giving member states the possibility to propose a convergence roadmap in the context of the European Semester, specifying structural reform plans and convergence targets. Convergence targets should be restricted to a small set of output convergence goals that allow for better policy-targeting and give more emphasis to policy-prioritisation. National convergence roadmaps would be assessed by the European Commission, while the Council would need to approve financial support of structural reforms which would depend on the potential for positive spillovers, continuous implementation of the reform package and achievement of the agreed convergence goals. Existing resources from the European Structural and Investment Funds should be used for this purpose. Restricting program eligibility to member states with below average per-capita GDP would ensure that resources are channelled towards those countries with the greatest need to catch up.

Publication

Dolls, Mathias, Clemens Fuest, Carla Krolage, Florian Neumeier and Daniel Stöhlker,Convergence in EMU: What and How?, European Parliament’s in-depth analyses, Requested by the ECON committee, Brüssel, 2018, PDF Download