Federal Reserve Bank of Cleveland
Press Release

For Release: December 23, 1997
Contact: John Martin, 216/579-2847 or June Gates, 216/579-2048

Monetary Union in Europe Will Uncouple Monetary and Fiscal Policymakers

The establishment of a supra-national monetary authority and a common currency in the European Monetary Union (EMU), by separating monetary policy decisions from fiscal decisions, will force a reconsideration of the relationship between monetary and fiscal policy among member governments.

In a recent Economic Commentary, "Money, Fiscal Discipline, and Growth," Federal Reserve Bank of Cleveland President Jerry Jordan says that governments sometimes instruct or pressure their central banks to issue excessive amounts of money, violating the public's trust by generating unanticipated inflation. Through unanticipated expansions of the money supply, central banks can levy an unlegislated tax, reduce the real value of the government's outstanding debt, or attempt to exploit a short-term trade-off between growth and inflation. Such options will be foreclosed in EMU because monetary policymaking in the region will be uncoupled from the fiscal policy of any individual country. The monetary authority will thus be free to pursue sound money, which is a requirement for financial efficiency.

However, Jordan cautions, if the consolidated fiscal position of all the EMU member countries becomes unsustainable, confidence in the soundness of the common currency may wane.

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