Overview

ADEMU (A Dynamic Economic and Monetary Union) is part of the Horizon 2020 work program topic Resilient and sustainable economic and monetary union in Europe (EURO-1-2014). The primary focus of the project is on the dimension The impact of macroeconomic and social imbalances on economic stability.

In response to the European debt crisis and associated deep recession, a number of important steps have recently been taken towards redesigning the institutional architecture of EMU, based on the roadmap outlined in the Van Rompuy Report (2012). But these institutional innovations – in particular the ‘fiscal compact’, the ESM, the SSM and the SRM – retain relatively weak theoretical foundations. In particular, there is a noticeable gap between policy-oriented analyses of the precise EU challenges, and the major developments in dynamic macroeconomic theory of the past three decades.

ADEMU brings together eight research groups from leading European institutions with the aim of closing this gap. It studies the overall monetary and fiscal structure of the EU and the euro area, and the mechanisms of fiscal policy coordination among member states, with specific focus on:

  1. ensuring the long-term sustainability of EMU, addressing issues such as debt overhang, fiscal consolidation, public debt management, risk-sharing within the union, and crisis management mechanisms;
  2. building resilience to economic shocks, with special emphasis on the coordination of fiscal policies, fiscal multipliers and labor market risks; and
  3. managing interdependence in the euro area, analyzing both fiscal and financial spillovers and the effects of macroeconomic imbalances on financial and money markets, and, to confront these issues, new forms of banking regulation and monetary policy.

ADEMU is at the frontier of dynamic macroeconomic research, and the project will generate new knowledge that will be used to provide a rigorous assessment of the current institutional framework, and detailed proposals for improving it. It will also be a focal point in debates among academics, policymakers and other stakeholders regarding the implementation of new policies. The scope of the project will include a full consideration of political economy and legal dimensions to alternative institutional reforms.

Main Objective

To conduct a rigorous investigation of risks to the long-run sustainability of EMU, and to develop detailed institutional proposals aimed at mitigating these risks.

Specific Objectives

  1. To clarify the determinants of sovereign debt crises, to develop new indicators that could be used to assess the risk of such crises occurring, and to devise new strategies for reducing this risk.
  2. To devise credible rules and strategies for sustainable public debt management appropriate to the institutional and demographic characteristics of the EU/euro area.
  3. To provide detailed institutional proposals for optimal fiscal risk-sharing among EMU member states, subject to the constraint that participation cannot be enforced, and to contrast these proposals with the existing institutional framework (e.g. the ESM).

ADEMU Work Packages

WP1: Long-term sustainability of a monetary and fiscal union

Focus on the long-run sustainability of EMU – in particular the sustainability of sovereign debt, and of union-wide burden-sharing mechanisms.

WP2: Stabilization policy in currency unions

Assessment of the short-run stabilising potential of alternative approaches to conducting fiscal policy in a currency union, so as to improve resilience to macroeconomic shocks.

WP3: Macroeconomic and financial imbalances and spillovers

Focus on the macroeconomic and financial interdependencies that are of relevance to reformed institutional governance of the euro area. Attention is placed on two specific categories: international spillovers, particularly those associated with fiscal policy, and macroeconomic and financial imbalances.

WP4: Policy Implementation

Assess the practical hurdles associated with implementing institutional reforms for the better management of fiscal policy within the EU, with a particular focus on the legal, political and behavioural constraints that the current EMU fiscal institutional structure – and, in particular, the alternative ADEMU proposals – may face.