Economic governance in an enlarged euro area

Ten years on from its launch, it is clear that EMU, which has to be regarded as a more profound regime change than is often acknowledged, has had a pronounced effect on economic governance. As a framework for the conduct of macroeconomic policy, EMU has had undoubted successes in assuring price stability and in instilling greater fiscal discipline, yet it is open to the criticism that it has not (yet?) delivered improved performance in the real economy. Moreover, some of the compromises made at the outset and over the twenty years
since the roadmap for EMU was first set out, notably to reconcile divergent French and German preferences, have left certain elements of the policy architecture unresolved. In the coming years, several more Member States are expected to become full participants in EMU, so that fresh thinking on the governance arrangements is warranted, not least to accommodate the rather different economic characteristics of the candidate countries.

This essay looks at the governance of EMU and how it may need to evolve as the euro area enlarges. It discusses the meaning of economic governance and puts forward a conceptual
model embracing different facets of governance, highlighting the significance of policy coordination, then assesses how well EMU fares on these aspects of governance. The essay then discusses the challenges of fulfilling the convergence criteria for prospective new members of the euro area and suggests possible changes in the application of the criteria, and considers how the institutional structures for managing EMU may need to evolve. The need for greater
politicisation of economic decision-making and for new approaches to policy co-ordination – especially to integrate the supply-side more effectively - is stressed as a likely way forward if EMU is deal with emerging demands on policy-making.