Does the EMU Necessitate the Co-ordination of Active Labour Market Policy in the Member Countries?

The Treaty of Amsterdam has enlarged the acquis communautaire of the European Union by a chapter concerning the common employment strategy. It focuses on the co-ordination of active measures. In this paper it is examined, whether active labour market policy may cause problems, which only occur in a monetary union and necessitate the co-operation of the member states on the European level. Indeed, the so-called stability pact impedes new debts and the lack of nominal exchange rates as an instrument of adjustment intensifies intra-Union tax competition. The resulting sub-optimal level of active labour market policy can be raised by financial co-operation. On the other hand, a centralised employment strategy is the consequence of political efforts to involve the European Central Bank (ECB). If the ECB resists the political pressure and concentrates on internal price stability, fiscal co-ordination will lead to an excessive use of active labour market policy and affect European competitiveness on the world markets. Eventually, social costs will be higher than in the non-co-operative equilibrium.