The Conflict Between The European Central Bank Monetary Policy And The Member States Is Relatively Independent Of Fiscal Policy And Coordination

The emergence of euro signified that the procedure of creating European Economic and Monetary Union has officially proceeded into the third stage. Meanwhile, the conflicts between the unified monetary policy to be performed within the euro zone and the relatively independent financial policies among the member countries persist as one of the major issues haunting the theorists and policy-makers. Every since 2001, the widespread influence of an overall economic slump in Europe has forced economic superpowers like Germany and France to confront their own heavy deficits. It was like the theoretic nightmares came true.This paper first introduces general theories of economic integration and optimal currency area and reviews the history of European Union and European Economic and Monetary Union.After presenting a general knowledge of the European Central Bank and Central Bank System, the paper explains the objectives of EMU's unified monetary policies so as to identify the source of the conflicts between the monetary policies and member countries'financial policies.Using Sargent-Wallace model, the paper justifies the existence of such conflicts from the perspective of the Game Theory, and argues that when the financial authority acts as the Stackelberg leader, a country is bound to have a deficit higher than what is required by the Maastricht Treaty as necessitated by the circumstances. However, if the game repeats itself over and over, the financial authority will have to make a wise choice by restraining its own behavior so as to attain mutually best results, for the repetition itself will eventually lead to minimized benefits for both sides.Empirically, the paper first analyzes the performance of the unified monetary policies ever since euro was run and finds that price stability was basically realized and the economic boom cycles of member countries manifest a relatively high level of relativity. Then it identifies the real-life presence of the conflicts between unified monetary policies and relatively independent financial policies; last but not least, the paper takes an in-depth look into the economic data of Germany of Luxemburg to come up with the conclusion that asymmetric effect can be induced by unified monetary policies, which lead the member countries to break out the deficit boundary set by the Maastricht Treaty as they are confronted with actual problems, thus taking the conflicts to the next level. Therefore, a contention is given that the conflicts are not really a technical issue, but rather a matter of interests.Finally, the paper proposes a few ways to settle the conflicts: Stability and Growth Pact must be amended to that purpose; the European Central Bank need to be cautious and prudent in choosing the right monetary policies; and all the member countries have to push for a better reformed taxation and social benefit system, reinforce the convergence of interests and make financial polices work better with the monetary policies.