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 co‐ordination. 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’