Coordination of a unique monetary policy and multiple fiscal policy

The European Central Bank (ECB) was established on 1 June 1998, twelve years ago. And it became the independent central bank in charge of the single European currency, the euro was introduced in January 1999. From the beginning, the ECB has played an important role in the launch of European monetary policy. With the adoption of the single currency by members of the euro area, we see a system based on a single monetary policy but fiscal policy multiples. This article summarizes the approaches discussed in the macroeconomics textbooks and connects with the institutional features of the euro area. The article thus consists of 5 main parts.

During the period from 1999 to 2007, with monetary policy respecting efficient, the average inflation rate remained slightly above 2% in line with targets. It is a remarkable achievement! However, some countries did not meet the Maastricht Treaty. A decline in government debt to get to levels more tenable necessary.

The first consideration is that monetary policy must focus on inflation. This is confirmed by numerous empirical data. Secondly, the provisions must comply with a fundamental assumption is that fiscal policies are sound and sustainable conditions indispensable to growth and prosperity. Thirdly, a clear division between the objectives of authorities is not sufficient. We must give this distribution targets in the central bank given the interdependencies between monetary and fiscal policies to end to stabilize prices.
We have 3 reasons as following: 1. Effects on request. 2. Tax changes – changes in prices. 3. Budget constraint of the public sector (the burden of debt) which causes changes in interest rates and inflation expectations.

Fourth, the mechanism relating to monetary and fiscal policies must take into account that the benefits of policies that are based on rules, as opposed to purely political “discretionary”. In addition, the announcement of a quantitative definition of price stability plays the role of No commitment can be used to constantly monitor and evaluate the performance of the central bank. Regarding fiscal policies, it is necessary to establish monitoring mechanisms that prevent effective budget fiscal developments unsustainable, because the experience of fiscal activism proved ineffective.Therefore, the objective of fiscal policy is to ensure the sustainability of public finances, taking steps to adjust the structural budgetary imbalances.

Monetary policy has set its objective to maintain price stability. And policymakers must bud-budgetary meanwhile letting the automatic stabilizers to absorb shocks. It is necessary to take a collective budget mechanism limiting the emission of incurred debt nationally. We must ensure a balanced position in each member country.

We first talk about the political and monetary. The Treaty assigns to the Eurosystem’s task of maintaining price stability over the medium term in the euro area. It guaranteed the independence of the institutional perspective, personal and financial. The strategy was announced by the Governing Council of the ECB for the first time in October 1998. This strategy has adopted a quantitative definition of price stability, defined as a progression over one year of the index of consumer prices (HICP) below 2% in the euro area. But in 2003, when to guard against the risk of very low inflation and deflation, the board said it aims to maintain HICP inflation at rates below but close to 2% in the medium term.

The Stability and Growth Pact (SGP) provides a framework for monitoring fiscal policy and ensures fiscal discipline and long-term sustainability of public finances. The SGP is forcing Member States to avoid excessive deficits. If they spend 3% of GDP deficit and 60% of GDP in public debt, they are subjected in the process of punishment. The SGP was adopted in 1997. So a “Stability Program” must be submitted by countries in the euro area, and a “convergence program” was initiated by countries outside the euro zone. Eight years later, the SGP reform in 2005 introduced more flexibility in procedures to ensure that countries can implement quickly and effectively measures to reduce deficits pupils. Moreover, the European Commission and the Ecofin Council plays a central role in the implementation of the budgetary framework of the EU.

- Selected indicators of monetary policy
The Index of Consumer Prices Harmonized (HICP) is chosen by the EMU as an indicator of inflation. The source of Eurostat for the period 1999-2007, we see that annual inflation reached its highest level in 2001 (3.1%) and in 1999 the lowest (0.8% ). However, higher annual average HICP inflation over this period has been slightly above 2%. The result of price increases since 2000 is due to a series of unexpected negative shocks that have occurred over the period. The analysis of the entire period, overall inflation was driven mainly by energy prices and also food. But the price developments of these compositions were partially offset by positive developments overall price manufactured goods excluding energy, due to international competition, technological progress and the rapid growth of productivity. Note that with these developments very volatile, monetary policy has allowed to maintain volatility in the overall HICP at a remarkably low and stable over time. Given the difficulty of predicting unexpected negative shocks on inflation, expectations of inflation is unclear.

- Selected indicators of fiscal policies
With the commissioning of CHP, the budget deficits were much lower than in the early 80s on average. In detail, in 1999 and 2000, a low budget deficit promotes macroeconomic environment. But in 2003, the average deficit in the euro area rose to 3% of GDP and 5 of the twelve countries exceed this reference value, or 3% of GDP. The situation has considerably improved since 2004. The lowest point was in 2007, to 0.6% of GDP. From a perspective of the overall package, the 1.6% decline in the ratio of average budget deficit of the euro area is facilitated by lower interest payments from the state. This low level of interest rates long term in EMU (EMU) is the result of a credible monetary policy which guarantees of expectations of low and stable inflation and risk premiums low.