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Macroeconomic co-ordination in the euro area: the scope and limits of the open method

A co-ordinated approach to fiscal policy in the euro area is desirable from a political economy standpoint if it protects against the harmful side effects which can arise from member states’ fiscal policies. At the same time, however, closer economic co-ordination between national governments is perceived by some as a threat to the independence of the European Central Bank and with it the credibility of its price stability mandate. A variant of the open method, which is known as multilateral surveillance, has been assigned the unenviable task of minimizing the costs of macroeconomic co-ordination, while at the same time delivering the benefits. Whilst the open method poses little threat to the independence of the ECB, its effectiveness is contingent, in the absence of legal obligation and the threat of financial penalties, on the impact of peer pressure and consensus- building mechanisms. This paper assesses the potential of these mechanisms and then draws lessons about the scope and limits of the open method in the light of Portugal’s recent breach of the Stability and Growth Pact.