Macroeconomic indicator harmonization in the EU

Lead-researcher

Jessica de Vlieger

‘Portugal and Spain face EU sanctions over violation of deficit rules’, ‘Low inflation worries the Euro Zone’. We are confronted with headlines like these on a daily basis. Economic statistics play a crucial role in European politics. Macroeconomic indicators like inflation targets and employment goals inform and shape policymaking in Europe and the consequences can be quite drastic leading to sanctions and austerity measures.

Explain the timing and content of harmonization efforts

This subproject asks how and why the EU decided and agreed to use a particular macroeconomic indicator and not another, and how it decided on definition and measurement to shed light on the choice and measurement of macroeconomic indicators in the EU. We will explain the timing and content of harmonization efforts, uncover which political, social and economic factors have played a role, and analyse how different stakeholders such as experts, statisticians, national leaders and European institutions have influenced the choice and features of economic statistics. 

EU frameworks are central

Macroeconomic indicators are defined and measured according to European guidelines and frameworks. Yet, we know little about their origins: what has shaped the choice for and development of common European economic yardsticks? The production of economic statistics, covering for example economic growth, unemployment or inflation, long belonged to the domain of the state. Countries had their own and often differing traditions, uses, measurements and definitions.

Fighting about European rules

We now possess harmonized tools that allow us to ‘see’ the European economies, through lenses of common and comparable indicators, but how did these come about? We should expect countries to have rather diverse preferences. Each EU member state might prefer sticking to its own measures, rather than adopting those developed elsewhere. But the politics run deeper. Member states’ economic structures differ widely. So one way of measuring, say, unemployment in Portugal might make the problem look manageable, a different one might set off alarm bells. With hard European rules about macroeconomic management, we should also expect hard fights about which yardsticks are appropriate to assess it.

Why the choices that are made?

We lack understanding about the origins of EU involvement in the measurement and characteristics of macroeconomic indicators. Why do we use deficit and debt to evaluate the viability of public finances, and why do we for example allocate structural aid on the basis of GDP per capita? Why are housing costs excluded from inflation measurement and why do we classify a person as employed when he or she has at least one hour of paid work per week, and not two, twelve or twenty? GDP, debt and deficit, unemployment and inflation have very different applications and uses in policy-making, but all have been harmonized to various degrees.

The euro changed everything

In the 1990s, Economic and Monetary Union increased the push for harmonized measures with countries’ participation conditional on the fulfillment of convergence criteria. One of them centered on inflation rates, so the EU created a Harmonized Index of Consumer Prices (HICP). Equally important, the EU had to hammer out a tight definition of public debt and deficits – something that turned out to be a lot harder, and much more politicized than negotiators might have hoped.