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Monetary Cooperation in Europe and the Problem of Differential Productivity Growth: an argument for a 'two-speed' Europe

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  • Bob Beachill
  • Geoff Pugh

Abstract

Cointegration analysis of a productivity-modified purchasing power parity relation supports the hypothesis that—in the long run—the nominal exchange rate adjusts to accommodate different national rates of productivity growth in the traded goods sector. Accordingly, in the long run, an absence of exchange rate flexibility combined with productivity growth differentials is likely to generate an intractable adjustment problem. Because Germany and France display a similar evolution of productivity, this analysis supports their participation in monetary union, whereas a markedly different pattern of productivity growth in the UK constitutes an argument against membership. In passing, we find empirical support for Michael Porter's hypothesis that continuous devaluation can reduce the rate of productivity growth. This also has implications for UK membership.

Suggested Citation

  • Bob Beachill & Geoff Pugh, 1998. "Monetary Cooperation in Europe and the Problem of Differential Productivity Growth: an argument for a 'two-speed' Europe," International Review of Applied Economics, Taylor & Francis Journals, vol. 12(3), pages 445-457.
    • Handle: RePEc:taf:irapec:v:12:y:1998:i:3:p:445-457
    DOI: 10.1080/02692179800000018
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    References listed on IDEAS

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    1. Martin Cincibuch, David Vávra, 2001. "Toward the European Monetary Union - A Need for Exchange Rate Flexibility?," Eastern European Economics, Taylor & Francis Journals, vol. 39(6), pages 23-63, November.
    2. Cincibuch, Martin & Vávra, David, 2000. "Towards the EMU: A Need For Exchange Rate Flexibility?," Transition Economics Series 17, Institute for Advanced Studies.
    3. Josheski, Dushko & Koteski, Cane & Lazarov, Darko, 2011. "Empirical testing of Balassa-Samuelson hypothesis with German and UK data," MPRA Paper 33803, University Library of Munich, Germany.

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