Regional Nonadjustment and Fiscal Policy: Lessons for EMU
How will countries handle idiosyncratic national macroeconomic shocks under the European single currency? The ways in which European countries now react to internally asymmetric shocks provide a better forecast than do the regional response pattern of the United States. In this paper we compare the US with Germany, Italy, the United Kingdom, and also with Canada, which is closer to European than the US is in its labor market and fiscal institutions. Europe's (and to some extent Canada's) model of regional response differs from that of the US. Changes in relative regional real exchange rates are general small. Outside of the US, however, there is more reliance on interregional transfer payments, less on labor migration, and the pace of regional adjustment appears slower. The regional adjustment patterns currently prevailing within European currency unions--characterized by limited labor mobility and price inflexibility--seem likely to prevail at the national level under the single currency. If EMU aims to attain the economic and social cohesion of its constituent nations, it therefore may be hard to resist the eventual extension of existing EU mechanisms of income redistribution--a transfer union. We propose an alternative strategy based on a relaxed stability pact, further strictures against central EU borrowing, labor market and fiscal reform, and the issuance by individual member states of debt indexed to nominal GDP.
|Date of creation:||Jun 1999|
|Date of revision:|
|Publication status:||published as Economic Policy, vol. 26, pp. 205-259, 1998.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Decressin, Jorg & Fatas, Antonio, 1995.
"Regional labor market dynamics in Europe,"
European Economic Review,
Elsevier, vol. 39(9), pages 1627-1655, December.
- Obstfeld, Maurice, 1998.
" Open-Economy Macroeconomics: Developments in Theory and Policy,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 100(1), pages 247-75, March.
- Maurice Obstfeld, 1999. "Open-Economy Macroeconomics, Developments in Theory and Policy," NBER Working Papers 6319, National Bureau of Economic Research, Inc.
- Maurice Obstfeld, 1997. "Open-Economy Macroeconomics: Developments in Theory and Policy," Working Papers 958, Queen's University, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6431. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.