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Fiscal and Monetary Policy In the European Union, An Inconsequential Analysis


Total Posts: 3

Joined 2018-05-08


A few days ago, a friend who was going to advance an English debate asked my help to analyze his debate motion. The motion of the debate is a matter of pro-contra-authority of the European Central Bank to veto the draft Law on the Budget of the EU countries. It may resemble the authority of the Indonesian parliament in the matter of approving whether or not the APBN Law. Although the House of Representatives in Indonesia seems to be more powerful than the European Central Bank veto (which is being debated) in terms of determining the budget. But I am not discussing the House of Representatives, so forget about the House problem. Suppose the House never existed.

Later this afternoon, I received a Public Finance course on fiscal policy. The material of this fiscal policy has indeed been discussed several times in the previous courses, and the contents are indeed repeated. But at that time I was reminded to the European Central Bank as an institution that handles the monetary policy affairs of EU countries that use the euro currency. These countries are called eurozone.

As is known, government instruments in the intervention of the country’s economy there are two, namely fiscal and monetary policy. Fiscal policy through regulation of government spending and revenue, or it may be called budget policy. While monetary policy through regulation of money circulation in a country. The two instruments are used by the government in carrying out its functions in the economic field, namely stabilization, distribution, and allocation.

Monetary and fiscal policy actually has a very close relationship and the two support each other for the achievement of targets to be addressed by the government. For example, when expansionary fiscal policy (aimed at increasing economic passion, through the budget deficit), in addition to increasing economic and investment passion, it also increases interest rates. Then testify a close friend of fiscal policy, namely monetary policy. Through monetary policy, the government will lower interest rates and it will also add to the economic passion. So happened “double hit” and the economic passion is increasing through death duet between fiscal and monetary policy. But interest rates remain stable. Thus theoretically, the relationship between fiscal and monetary policy. Keep in mind here I will not discuss the debate between the monetarist and the keynesian about which is better between fiscal and monetary policy.

The situation is different if it is applied in the European Union. As is known, the relationship of mutual support between fiscal and monetary policy can be arranged easily in the case above because the control is still under one institution, namely the government of a country. Unlike in the European Union, fiscal and monetary policy arrangements are becoming increasingly complex as monetary policy is under the control of the European Central Bank, while fiscal policy is under the control of individual governments. Indeed, the EU also has a “common government institution” which can be said to govern all EU countries even if not fully (including in the field of fiscal policy). But this is actually not too abort the problem that the author wants to discuss.

Such an EU institutional model can not make the country in full control of the country’s own finances. This happens because EU countries are like “the same weight bears the same light portable”. Therefore, the monetary policy arrangement made by the European Central Bank will affect all countries under its auspices, namely countries that use the currency Euro (eurozone). Meanwhile, each country’s fiscal policy is carried out by each country with the consideration of other EU “shared governmental institutions”. The likelihood of the agency is the European Commission. For the record, the EU has 7 government agencies including the European Central Bank and the European Commission. For more details please refer to wikipedia.

Well, what I consider to be a problem here is the freedom of will of the eurozone countries to regulate the economic policies of the country. There may be a conflict between one country’s destination and another in determining its economic policy. Let’s say that Greece wants to make expansionary policies, while other countries, such as Germany, want to apply a contractive policy. If the expansionary and contractive policies of the two countries are in the fiscal realm, that is certainly not a problem because the two countries have independent control over it. Although it should also remain within the prescribed boundaries with EU members. watch bein sports But in monetary affairs, both will clash. This happens because the monetary policy undertaken by the European Central Bank affect the entire country eurozone. Thus, the European Central Bank can not mess around in its policy determination.

Let’s use illustrations to make it more clear. On the one hand, Greece wants the European Central Bank to adopt an expansionary monetary policy to foster its expansionary fiscal policy. On the contrary, Germany wants the European Central Bank to conduct a contractionary monetary policy in line with its fiscal policy. In this case, the Central Bank must choose one of them, or be neutral. If the Central Bank chooses one of the policies, then it will harm either party. If the Central Bank is neutral or it uses unchanged monetary policy with the previous year, then we will fail to see a death duet concert between fiscal and monetary policy. The theoretical duet as we discussed earlier as a duet supporting each other achieves the target of a government.

However, the actual existence of EU government institutions is not bad (including the European Central Bank). As I said before the EU countries apply the principles of mutual help and loyal friends. So when there are countries that are experiencing economic downturn and need an injection of hormo