Government–Financial Market Relations after EMU
| Author | Layna Mosley |
| Published date | 01 June 2004 |
| Date | 01 June 2004 |
| DOI | http://doi.org/10.1177/1465116504042443 |
| Subject Matter | Journal Article |
Government–Financial
Market Relations after EMU
New Currency, New Constraints?
Layna Mosley
University of Notre Dame, USA
ABSTRACT
The European Monetary Union (EMU) has generated a
variety of changes, including the loss of national monetary
policy autonomy and the creation of deeper integrated intra-
European markets for goods, services, and financial instru-
ments. This article explores the extent to which EMU has
changed the ways in which and the extent to which inter-
national financial markets influence national policy choices.
There are important reasons to expect that financial markets
exert greater influence on governments after EMU; for
instance, governments now borrow in what is essentially a
foreign currency. This change might serve to heighten the
perceived danger of default in Europe. At the same time,
however, financial markets appear to reward governments
for the fiscal consolidation and increased market liquidity
that flow from the single currency. I argue that, as a result
of these offsetting trends, there have thus far been no
dramatic changes in financial market–government relations.
Although governments continue to face external pressures
on domestic policy-making, these pressures may be only
slightly more severe for EMU than for non-EMU countries.
As in the past, domestic politics and institutions will be as
important as, if not more important than, financial market
pressures in EU governments’ policy decisions.
181
European Union Politics
DOI: 10.1177/1465116504042443
Volume 5 (2): 181–209
Copyright© 2004
SAGE Publications
London, Thousand Oaks CA,
New Delhi
KEY WORDS
EMU
financial globalization
government bond market
international capital
markets
Stability and Growth
Pact
Sweden
02 042443 (to/d) 15/4/04 12:26 pm Page 181
Introduction
The advent of Economic and Monetary Union (EMU) in Europe has brought
a variety of changes, including the loss of national monetary policy autonomy
and the creation of deeper intra-European markets for goods, services, and
financial instruments. EMU also brings greater attention to national fiscal
policies, as some governments struggle to comply with the Stability and
Growth Pact (SGP) and others call for its enforcement. These calls are, in part,
based on the assertion that financial markets will react unfavorably to
continued fiscal deficits, placing even greater pressures on governments.
This argument begs the question of the strength of financial market influ-
ences. How important have private capital markets been to past government
policy choices? To what extent has EMU changed the ways in which and the
extent to which international financial markets influence national policy
choices? How are government–financial market relations in EMU nations
different from those in non-EMU nations, and how might these differences
affect future accessions to EMU?
There are important reasons to expect that financial markets exert greater
influence on governments after EMU. For instance, EMU governments now
borrow in what is essentially a foreign currency, and this might serve to
heighten the perceived danger of default. But, at the same time, financial
markets reward governments for the fiscal consolidation and increased
market liquidity that flow from the single currency. Owing to these offsetting
patterns, then, there have been no dramatic changes in financial
market–government relations. Although governments continue to face
external pressures on domestic policy-making, these pressures are only
slightly more severe for EMU than for non-EMU countries. As in the past,
domestic politics and institutions are more important than financial market
pressures in European Union (EU) governments’ policy decisions.
This article first reviews the extant literature on financial market–govern-
ment relations. It then discusses several ways in which EMU may change the
pattern of financial market–government relations, including the added risk
of default on government debt and the unenforceability of the SGP. Finally,
the article examines the extent to which policy-making in one non-EMU
member, Sweden, has been influenced by global capital markets and suggests
how these influences could change with EMU membership.
Financial globalization and European welfare states
During the past decade, scholars have devoted substantial attention to the
impact of economic globalization on national policy choices. This literature
European Union Politics 5(2)
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