Study calls for greater coordination between the European Central Bank and national fiscal policies

Researchers at the University of Seville have analyzed interdependencies between fiscal and monetary policies and economic growth in Eurozone countries. The study highlights the need for greater coordination between the monetary policy of the European Central Bank (ECB) and national fiscal policies.

Without such coordination, structural differences between core and peripheral countries will persist, limiting the potential for economic integration. Moreover, against a backdrop of rising inflation and rising interest rates, the authors raise concerns about the sustainability of growth in peripheral countries, where higher financial costs could aggravate fiscal problems.

Using an innovative approach based on econometric models and graph theory, the authors explore how the fiscal policies of each country and the common monetary policy interact. They also explore the differences between countries in the core and periphery of the Eurozone. The study is published in the Journal of Economic Studies.

The research distinguishes between the “core group”—countries such as Germany, France, Italy and the Netherlands, where price stability and monetary policy have a positive impact on economic growth—and the “peripheral group”—with states such as Spain, Portugal and Greece, where fiscal policy plays a greater role, but monetary policy does not contribute to growth in the same way.

Since the creation of the Economic and Monetary Union (EMU), Eurozone countries have shared a common monetary policy, managed by the European Central Bank (ECB), but maintain independent fiscal policies. This lack of coordination has led to significant differences in economic growth and stability, especially in times of crisis such as the 2008 financial crisis and the COVID-19 pandemic.

The authors also stress that monetary policy does not have the same impact in all countries.

Only in some core states (Germany, France, Italy, the Netherlands) is there a significant relationship between interest rates and GDP growth. In the periphery, this relationship is weak or non-existent.

Fiscal policy boosts growth in most countries. Except in Ireland, Greece and Luxembourg, fiscal policy (revenue and expenditure) has a positive impact on economic growth.

The lack of coordination between monetary and fiscal policy is a structural problem. While the ECB seeks price stability, national governments seek to boost growth through fiscal policies, which creates tensions and hinders economic convergence within the Eurozone.

In conclusion, the researchers note that the Eurozone remains a fragmented economic union. While core countries thrive on monetary stability, peripheral countries rely on more active fiscal policies. Without structural reforms to improve coordination between the two policies, economic divergence will remain a key challenge for the future of the Eurozone.