The Single Currency and Labour Market Flexibility : A Necessary Partnership?

This paper examines the macroeconomic consequences of rigidities in the European labour markets, and shows that attempts to impose a single monetary regime on economies with different structures can lead to a breakdown in coordination. Such breakdowns can occur when expenditure-switching effects are dominated by the income effects of greater policy discipline. Market flexibility should therefore be given greater importance than the process of policy formulation in the 'New Europe'