Making Emu Work: Some Lessons from the 1990s

Jerome Levy Economics Institute Working Paper No. 326

15 Pages Posted: 11 Apr 2001

See all articles by Jörg Bibow

Jörg Bibow

Skidmore College - Department of Economics; Bard College - Levy Economics Institute

Date Written: March 2001


This paper investigates the lessons learned from Europe's convergence process of the 1990s. The paper challenges the conventional focus on labour market institutions and "structural rigidities" as the root cause of Europe's poor employment record. Instead, it is argued that macroeconomic demand management, particularly monetary policy, played the key role. Concentrating on Germany, the analysis shows that fiscal consolidation was accompanied by monetary tightness of an extraordinary degree and duration. This finding is of interest for the past as well as the future, for the Maastricht regime much resembles the one that produced the unsound policy mix of the 1990s: a constrained fiscal authority paired with an independent monetary authority free to impose its will on the overall outcome. The analysis thus highlights a key asymmetry in the Maastricht regime that is not unlikely to continue to inflict a deflationary bias on the system. It is argued that this policy bias may be overcome only if the ECB deliberately assumes its real role of generating domestic demand-led growth, thereby resolving Euroland's key structural problem: asymmetric monetary policy. Concerning the conventional structuralist theme, the analysis debunks the "Dutch myth" of supply-led growth through structural reform. Depicting a popular fallacy of composition, we stress that the peculiar Dutch strategy of demand-led growth does not present itself as an option for Euroland.

Suggested Citation

Bibow, Jörg, Making Emu Work: Some Lessons from the 1990s (March 2001). Jerome Levy Economics Institute Working Paper No. 326, Available at SSRN: or

Jörg Bibow (Contact Author)

Skidmore College - Department of Economics ( email )

Saratoga Springs, NY 12866
United States

Bard College - Levy Economics Institute ( email )

Blithewood Rd
Annandale on Hudson, NY 12504
United States