Central banks, governments and the European monetary unification process

This paper explores the evolving relationship between central banks and governments in the European monetary unification process. In particular, it focuses on the institution-building phase (setting up of the ECB) and the monetary and macro-economic policy mix within EMU. I attribute the undeniable success of the institution-building phase to an exceptional convergence of favourable facts and influences. Most importantly: the strong political commitment of the governments concerned; the trust placed in central bank experts in preparing the Maastricht Treaty; the incremental momentum resulting from the tight timetable; and, last but not least, the prevailing macro-economic conditions. As for the monetary and macro-economic policy mix, it is argued that in the run-up to achieving EMU the convergence criteria spelled out by the Maastricht Treaty proved a very effective tool in aligning national policies and in consolidating central bank independence (which became, in fact, the "sixth" convergence criterion, conditioning access to EMU). However, since the late 1990s, this delicate balance seems to have become rather less secure for mainly three reasons: the weakening restraint of politicians with regards to monetary policymaking; the worsening performance of the economy in the euro area; and the fact that economic union continues to lag monetary union, particularly with respect to micro or supply side reforms.