ECONOMIC CONTENT OF CONVERGENCE CRITERIA

In document Regional monetary integration in the member states of the Gulf Cooperation Council (Page 49-51)

CONVERGENCE CRITERIA: PURPOSE, ECONOMIC CONTENT AND DESIGN

5.3.2 ECONOMIC CONTENT OF CONVERGENCE CRITERIA

With regard to the set of economic variables underlying convergence criteria, a basic distinction can be made between monetary,

fiscal and structural convergence criteria,

whereby monetary criteria concern indicators determined mainly by monetary policy, fiscal criteria concern indicators strongly influenced by fiscal policy, and structural criteria relate to the probability and severity of asymmetric shocks and the ability to cope with them (see Chapter 4). Whether monetary, fiscal or

Purpose Economic content Design

Key policy choices – information tool – monetary criteria – entry criteria vs. permanent criteria – anchor for policies and – fiscal criteria – selection criteria vs. indicative

expectations – structural criteria targets

– disciplining device – further issues (reference period, thresholds, scope for interpretation, etc.) Table 8 Key policy choices regarding convergence criteria

5 SOME CONSIDERATIONS ON CONVERGENCE CRITERIA FOR THE GCC structural criteria are more appropriate for the

GCC in order to achieve a convergence process depends largely on the focus and on the time horizon to be observed.

If the focus is primarily on policy convergence, in particular in the area of monetary and fiscal policies, and if a short to medium-term time horizon is to be captured, an emphasis on monetary and fiscal criteria is warranted. Accordingly, if convergence criteria primarily serve the purpose of indicating whether a sufficient degree of convergence in the area of monetary and fiscal policy has been achieved in order to enable a transition to a single monetary policy and to subject fiscal policy to commonly agreed rules, then this purpose is best served by criteria that refer to monetary and fiscal variables. Such criteria can also assist in the assessment of whether a sufficient consensus on the basic orientation of these policies exists as a crucial prerequisite for avoiding tensions

and conflicts in a monetary union.46

If however the focus is primarily on structural convergence over a longer time horizon, then structural criteria may be appropriate. Accordingly, if convergence criteria primarily serve the purpose of answering the question of whether a group of countries exhibit a sufficient degree of structural similarity to form a successful monetary union (i.e. whether on the basis of the optimum currency area (OCA) theory the establishment of a monetary union is advisable), a focus on structural criteria may be warranted.

Thus, the choice regarding the underlying economic variables in terms of monetary, fiscal and structural convergence largely depends on the kind of information policymakers in the GCC want to extract by monitoring and assessing the criteria. Given the interaction of monetary, fiscal and structural variables in the economy, some criteria may capture developments in more than one sphere. For instance, a criterion concerning exchange rate stability, although clearly a monetary criterion, may also be a useful structural indicator to

assist in examining whether economies have been hit by asymmetric shocks and whether adjustment mechanisms other than nominal exchange rate adjustments are in place. At the same time, monetary and fiscal criteria on the one hand and structural criteria on the other tend to differ with regard to (i) the degree to which they can be influenced by the authorities’ policies, and (ii) the time horizon over which major variations of the underlying economic variables may occur. While the development of monetary or fiscal variables such as the inflation rate or the budget deficit depend to a large extent on the course taken by monetary and fiscal policymakers, structural variables such as the sectoral structure of the economy, trade patterns, labour market features or growth cycles are largely beyond the authorities’ immediate control. They are influenced by various domestic and external factors and by the decisions of a variety of private and official agents. This also largely explains the different time horizons over which monetary and fiscal variables on the one hand and structural variables on the other can be influenced. While monetary and fiscal data usually reflect a shift in the respective policies relatively quickly, the effects of policies designed to, for example, enhance growth or reduce unemployment, or to foster structural change or trade integration, typically take

longer to show.47 The key features of monetary,

fiscal and structural convergence criteria are summarised in Table 9 below.

46 See Corden (1993) on the role of stability preferences in the formation of monetary unions.

47 Moreover, structural variables are of less concern in the context of a monetary union if price stability is the primary objective of monetary policy, and if monetary policy is considered to be neutral in the medium and long term with regard to its real effects. While this does not imply that such variables are irrelevant, structural features of the economy, such as the synchronisation of business cycles, would deserve more attention if monetary policy is assigned the task of f ine- tuning the economy and influencing real variables such as growth and employment. The fact that the former view of monetary policy is part of the policy consensus upon which the Maastricht Treaty (as the monetary constitution of the euro area) was built explains to a large extent why only monetary and f iscal convergence criteria were incorporated into the European Community (EC) Treaty.

In the context of the GCC, the political decision to introduce a single currency has been taken. Thus, the function of convergence criteria is not to determine whether GCC countries should form a monetary union, or indeed whether they can be regarded as an OCA. This understanding is reinforced by the GCC member states’ intention to design the criteria not as selection criteria, and to start monetary union with all member states (see sub-section 5.3.3 below, second indent, on issues arising in this context). The time frame for the convergence process has also been determined by setting 2010 as the date for the introduction of a single currency, and 2005 as the point in time when member states shall begin to strive to fulfil the convergence criteria. In view of this framework and the above considerations, a focus on monetary and fiscal criteria tends to be the most appropriate approach for the GCC’s current deliberations on the design of

In document Regional monetary integration in the member states of the Gulf Cooperation Council (Page 49-51)