This paper will assess the functioning of the European Semester (ES) from an overall Euro Area pe... more This paper will assess the functioning of the European Semester (ES) from an overall Euro Area perspective. The ES has the potential to address macroeconomic divergences within the Euro Area and contribute to enhancing the structural stability of the single currency area. Art 121 TFEU stipulates specifically the 'closer coordination and sustained convergence' as one of the objectives of the economic policy coordination.1 The scope of this paper will therefore be the macroeconomic imbalances pillar of the ES of which the legal basis is outlined in Regulations 1174/2011 and 1176/2011. In order to assess whether the ES is effectively addressing the current divergences, the research will be conducted along three lines. First, the current account imbalances within the Euro Area. There is a so-called 'North-South divide' which is manifested amongst others by means of the substantial trade imbalances: the northern countries have a large trade surplus and the southern countries have a trade deficit. Before the introduction of the Euro, the individual countries could adopt monetary policy, namely setting the interest rate, as a tool to mitigate large current account deficits. As this policy instrument is now centralized, it cannot be used anymore to counter trade deficits of specific countries within the Euro area and adjustments should be carried out via economic policy. One important aspect is the level of wages in a country in relation to the productivity: the wage-productivity ratio. In deficit countries, the wages could be too high in relation to the productivity and the opposite in surplus countries.2 Adjusting (domestic) price levels also constitutes a tool to adjust current account imbalances.3 Furthermore, Regulation 1176/2011 names two manners for addressing trade surpluses: strengthening domestic demand and enhance growth potential.4 Second, assessing the inclusion of possible spillover effects and Euro Area broad aspects in the Country Specific Recommendations (CSR's). The setup of the ES seems to be focused on individual countries by issuing country specific recommendations. However, the EMU countries share a currency and their economies are closely linked to each other. An assessment will be made of the CSR's to determine whether spillover effects and the overall stability of the Euro Area are effectively addressed. Third, an assessment of ES instruments targeted at the Euro Area as a whole. The communications that are most suitable for this are the recommendations for the Euro Area situated early in the annual ES cycle. An assessment will be made of whether these communications address the current account imbalances, spillover effects and overall stability of the Euro Area. The first part of the paper consists of a self-conducted research on the ES' CSR communications of 2015 and 2016 for four different countries. On the one hand, a study on the contents of the CSR's for Germany and the Netherlands representing the 'north' – with substantial current account surpluses. On the other hand, the CSR's directed to Portugal and Spain which have current account deficits. The second part will deal with the overall Euro Area recommendations for the same two years. The third part consists of a brief literature study.
This paper will assess the functioning of the European Semester (ES) from an overall Euro Area pe... more This paper will assess the functioning of the European Semester (ES) from an overall Euro Area perspective. The ES has the potential to address macroeconomic divergences within the Euro Area and contribute to enhancing the structural stability of the single currency area. Art 121 TFEU stipulates specifically the 'closer coordination and sustained convergence' as one of the objectives of the economic policy coordination.1 The scope of this paper will therefore be the macroeconomic imbalances pillar of the ES of which the legal basis is outlined in Regulations 1174/2011 and 1176/2011. In order to assess whether the ES is effectively addressing the current divergences, the research will be conducted along three lines. First, the current account imbalances within the Euro Area. There is a so-called 'North-South divide' which is manifested amongst others by means of the substantial trade imbalances: the northern countries have a large trade surplus and the southern countries have a trade deficit. Before the introduction of the Euro, the individual countries could adopt monetary policy, namely setting the interest rate, as a tool to mitigate large current account deficits. As this policy instrument is now centralized, it cannot be used anymore to counter trade deficits of specific countries within the Euro area and adjustments should be carried out via economic policy. One important aspect is the level of wages in a country in relation to the productivity: the wage-productivity ratio. In deficit countries, the wages could be too high in relation to the productivity and the opposite in surplus countries.2 Adjusting (domestic) price levels also constitutes a tool to adjust current account imbalances.3 Furthermore, Regulation 1176/2011 names two manners for addressing trade surpluses: strengthening domestic demand and enhance growth potential.4 Second, assessing the inclusion of possible spillover effects and Euro Area broad aspects in the Country Specific Recommendations (CSR's). The setup of the ES seems to be focused on individual countries by issuing country specific recommendations. However, the EMU countries share a currency and their economies are closely linked to each other. An assessment will be made of the CSR's to determine whether spillover effects and the overall stability of the Euro Area are effectively addressed. Third, an assessment of ES instruments targeted at the Euro Area as a whole. The communications that are most suitable for this are the recommendations for the Euro Area situated early in the annual ES cycle. An assessment will be made of whether these communications address the current account imbalances, spillover effects and overall stability of the Euro Area. The first part of the paper consists of a self-conducted research on the ES' CSR communications of 2015 and 2016 for four different countries. On the one hand, a study on the contents of the CSR's for Germany and the Netherlands representing the 'north' – with substantial current account surpluses. On the other hand, the CSR's directed to Portugal and Spain which have current account deficits. The second part will deal with the overall Euro Area recommendations for the same two years. The third part consists of a brief literature study.
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