Stabilising EMU and Shaping its Social Dimension

Monetary policy and fiscal policy form the two principle means, by which governments can influence economic developments. Monetary policy instruments affect the nominal levels of prices for goods and services as of wages denominated in a given currency. Fiscal policy instruments have, according to Keynesian economics, an impact on the aggregate demand. Assume now that, first, two countries form a currency union, in which monetary policy is supranationalised and fiscal policy remains in the national competence, that, second, there is a shift of demand from one country to the other one and that, third, wages and prices cannot be reduced in the short term. In such a situation unemployment rises in the one country whilst there is inflation pressure in the other. Supranationalised monetary policy instruments can now only aggravate the problem since a decrease in money supply would result into higher unemployment rates in the one country whereas an increase in money supply would intensify the inflationary pressure in the other country. Fiscal policy measures must now also undertake tasks previously assumed by monetary policy instruments.

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