EMU and Institutional Competitiveness: The Effects of Systems Competition
Beatrice Scheubel, European Central Bank
(Joint paper with Stefan Huemer & Florian Walch)
The paper aims to identify the effect of Economic and Monetary Union (EMU) on system competition, i.e. competition among different forms of national economic governance to attract foreign direct investment. To measure the degree of system competition the paper develops a new index of ‘institutional competitiveness’ that captures policy measures by governments to increase a country’s competitive position. Applying this index to euro area countries and a control group of EU and OECD countries, the paper finds that monetary union reinforces such competition among euro area countries. This might eventually result in harmful beggar-thy-neighbour policies and lead to the building up of fiscal and/or current account imbalances.