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Is the Euro Working? The Euro and European Labour Markets

  • Stephen Silvia

    (American University)

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    Now that four years have passed since the introduction of the euro as a commercial currency, it has become possible to assess many arguments made in the abstract during the 1990s about the implications of monetary union. This contribution does precisely that. In brief, the euro zone still falls short as an optimal currency area in most respects. In particular, an empirical analysis of labor-market developments shows no progress toward flexibility or integration. The findings undercut assertions that the euro will force a liberalization of labor markets, so that they can serve as the principal vector of adjustment in the new currency area. Instead, a “rigidity trap” has developed in the euro area—which consists of relatively tight monetary policy, forced fiscal consolidation, and the virtual elimination of the gap between the real and the nominal wage—making structural adjustment in labor markets more difficult.

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    Paper provided by EconWPA in its series International Finance with number 0508007.

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    Length: 22 pages
    Date of creation: 19 Aug 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpif:0508007
    Note: Type of Document - pdf; pages: 22
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    1. Maurice Obstfeld & Kenneth Rogoff, 2000. "Do We Really Need a New International Monetary Compact?," NBER Working Papers 7864, National Bureau of Economic Research, Inc.
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