Introduction:

In our view, the key objectives of economic policies should include the achievement of full employment, the promotion of environmentally sustainable and equitable growth free of inflationary pressures, the removal of poverty and a less unequal distribution of income. Macroeconomic policies (monetary, fiscal and exchange rate) have a crucial role to play in the pursuit of these objectives, and in this paper we focus on those policies, recognising that other microeconomic policies are also required (notably to ensure that growth is environmentally sustainable and to address the issues of poverty and inequality). By contrast, the objectives in the proposed EU constitution (Council of the European Union 2005) and retained in the now proposed constitutional treaty are of a different type. In article III-69, it is stated that there shall be compliance with “the following guiding principles: stable prices, sound public finances and monetary conditions”. We have criticised the neo-liberal agenda of the EU constitution in terms of these objectives in a recent paper (Arestis/Sawyer 2006).

The achievement of full employment and the other objectives requires the use of macroeconomic policy to secure high levels of aggregate demand and the building of adequate productive capacity. It cannot be assumed that a market economy will automatically provide sufficiently high levels of demand to provide full employment labour; nor can it be assumed that there will be sufficient productive capacity to employ all those seeking work. The alternative view, which we believe underpins the approach of the institutions of the EU, is that unemployment is a result of ‘inflexible’ labour markets, and hence the promotion of ‘flexible’ labour market policies will bring full employment. Monetary policy can be used to address inflation. We argue, though, that whether or not labour markets are ‘flexible’ is largely irrelevant when full employment is concerned, which requires high levels of demand and of productive capacity. Thus, we suggest that a reorientation of macroeconomic policy is necessary for the achievement of the major objectives of full employment and sustainable growth. Monetary, fiscal and exchange rate policies have a full role to play in the pursuit of those objectives.

We proceed in section 2 with a brief discussion of the main objectives and stance of current EMU macroeconomic policies. Section 3 examines the conduct of EMU economic policies, essentially monetary, fiscal and exchange rate policies, and suggest that co-ordination of these policies is essential. The final section summarises and concludes.