Eurozone Watch

1st part of our series on the EU after the Irish No to the Lisbon Treaty  

The European Council on June 19/20, 2008 did not indicate a way out of the EU crisis which resurfaced with the Irish „No“ to the Lisbon Treaty on June 12, 2008. But before and during the European summit, one “most likely” scenario emerged. The majority of member governments seemed to agree that the ratification process should be completed as far as possible – in order to get a clearer picture which governments or countries actually back or do not back the Treaty, and foremost, to put pressure on Ireland to negotiate some add-on to the Treaty and ratify it soon afterwards.

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Next Thursday, the ECB will most likely increase its interest rate by 25 basis points to 4.25 percent. Its president Jean-Claude Trichet has all but pre-announced this move and other members of the governing council have been busy underlining the message over the past weeks. This move could prove to be the most risky move ever done by the ECB – economically as politically.

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Everywhere across Europe, one can these days find conference discussing the achievements in 10 years of EMU. This week-end, I had the opportunity to go to Dublin to Euroframe's conference on that topic (see program here), presenting the latest findings of my joint research with Ulrich Fritsche and Ingrid Größl on divergences in EMU. As it turned out, Ireland has become one prime destination to visit the consequences of economic divergences in the euro-area.

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Two important political developments in the EMU surfaced on the ECB's tenth anniversary celebrations. Firstly, the EMU's fiscal policy coordination mechanisms are more in flux and under pressure than the EMU institutions would like to have the public believe since the reform of the Stability and Growth Pact. And secondly, the issue of lower than expected economic convergence within the Eurozone is receiving more and more attention: pro-longued business cyclces and cyclical divergence are now longer issues reserved for the macro-economic academic debate but are increasingly picked up by policy makers.

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