Globalization vs. Europeanization: Assessing the Impact of EMU on Business Cycle Affiliation

Abstract

At the onset of EMU, underlying the political debate between ‘monetarists’ and ‘economists’ (Tsoukalis 1997) was the idea that the creation of a single monetary area would produce the convergence of business cycles of its member states leading to a single, synchronized, ‘European business cycle’. This would mean a de facto elimination of the risk of asymmetric shocks, and would make the ‘one size fits all’ monetary policy of the ECB most effective. There are several papers which claim to discern the existence of such a cycle (e.g. Artis et al. 2004; Kaufmann 2003). The European business cycle forms the subject of analysis for the CEPR’s Euro Area Business Cycle Dating Committee and its coherence is a positive indicator for monetary union. But is ‘globalization’ overwhelming ‘Europeanization’? This chapter addresses this question focusing on business cycle affiliations, meaning the alleged tendency for some countries’ business cycles to cluster together with others. To this aim, the chapter derives deviation cycles for OECD countries and examines their synchronization through the application of fuzzy clustering techniques.

The author wishes to acknowledge the helpful research assistance of Peter Claeys of the EUI and the hospitality of the European Commission (DG-ECFIN) during a stay as Research Fellow there during the month of May 2004, when work on this chapter was advanced.