Even  though there may be some truth in this view, this paper adds to the growing literature that asks whether the performance gap between Europe and North America is really so large. Our main point is one of measurement issues. To be precise, we document that a recent change to the system of business and national accounts, in combination with a different way of deflating ICT investment, may have substantially distorted perceptions regarding productivity growth. Against this background we are able to put Europe’s economic performance somewhat better into perspective.

The interaction of the governments and the ECB is addressed in a game theoretical framework. First, the conditions under which in which the national governments are able to put pressure on the ECB are made explicit. Then the main question is addressed: would a greater fiscal coordination reduce or increase the capacity of the monetary authority of targeting long run inflation? Formal and informal, discretional (positive) and rule-based (negative) coordination and their interactions are examined as possible solutions of the game. 

I conclude that the main point is not how much fiscal coordination is there, but the form it takes. It turns out that a mix of informal political coordination and binding rules is the one that best preserves the independence of the ECB. For negative coordination, it is shown that a simple change in the definition of “excessive deficit”can at the same time allow more stabilization of output after a shock and a better control of inflation by the ECB.

The good news for monetary unions is that fiscal constraints on the national fiscal budgets are effective in re-establishing monetary dominance. They also ensure an ex-post policy mix of stability-oriented monetary and fiscal policies and moderate wage inflation. Some convergence in the structure of labor markets may, however, still be necessary.

The question is addressed by examining the interaction of monetary, fiscal and wage policies and their effects on prices in a monetary union hit by economic shocks. The theoretical model shows that fiscal activism is related with both entry in monetary union and with structural differences in the national labour markets, and analyses in detail the effect of both factors. As for acceding countries, the conclusion is that the process of deficit reduction should be completed before entry, as suggested by the Maastricht criteria. The chapter also suggests that fiscal constraints on government deficits appear essential in a monetary union when the wage formation is taken into due consideration.