EMU in the Early Years: Differences and Credibility

The main issue in the early years of EMU is one of credibility. On one hand, high exposure to asymmetric shocks and low adaptability (be it in terms of stabilization or adjustment) to both symmetric and asymmetric shocks make the early years of EMU potentially problematic. On the other hand, significant economic differences between EMU countries raise questions regarding the objective of price stability. Credibility-enhancing policy choices may, in the short run, conflict with optimal smoothing of shocks, but are essential to ‘ferry’ EMU towards its ‘steady state’. While a number of uncertainties still hang over the new regime, the Paper finds that the experience of EMU so far is heartening. Although economic divergences skewed on the high side made internal monetary misalignments politically less troublesome, the stability-oriented EMU framework fostered broadly appropriate policy behaviour in terms of both efforts to increase adaptability to shocks and of actual response to observed shocks.