Monetary Union and European Unemployment

Abstract

In this paper we analyse the likely effects of Economic and Monetary Union (EMU) on European unemployment. We start by describing the current unemployment situation in the European Union (EU). In so doing, we try to assess the relative importance of European, national and regional shocks in driving national and regional unemployment rates, and also to estimate the degree of real wage rigidity across EU countries. We then discuss various factors which, in principle, may contribute towards explaining the high and persistent EU unemployment rates, focusing on several labour market institutions like collective bargaining, job security legislation and unemployment benefits. The final part of the paper analyses, in light of the above evidence, the likely impact of EMU on European unemployment in the short and medium term. We conclude that while the presently high European unemployment rates should not preclude EMU from being established, the operation of the monetary union will be smoother and its net economic benefits larger if Member countries succeed in implementing those structural labour market reforms which are needed for unemployment to go to lower, more reasonable rates.

Keywords: Labour market institutions, monetary union, structural reforms, unemployment

JEL Classification: E52, E61, F33, F41, J64