Real Wage Rigidities, Fiscal Policy, and the Stability of EMU in the Transition Phase
IMF Working Papers, June 1, 1999
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Bibliographic details
- Authors: Eric Thode, Norbert Berthold, Rainer Fehn
- Published: June 1, 1999
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451850529.001
Summary
- EMU started with eleven member countries as scheduled on January 1, 1999.
- The paper argues that the primacy of politics over economics in the decision to start EMU could have serious consequences for the stability of EMU in the transition phase.
- Speculative attacks against currencies that are in economic distress due to asymmetric shocks can still happen.
- A speculative attack cannot, by itself, force a country out of EMU.
- A country might voluntarily decide to leave EMU if the costs of staying inside—e.g., further rising unemployment—become too large to bear.
Key findings and analysis
- Political considerations, rather than purely economic readiness, played a decisive role in the timing and composition of EMU at its start.
- Real wage rigidities and asymmetric shocks create economic distress for individual EMU member countries during the transition phase.
- Such distress can attract speculative attacks even within a monetary union context.
- The mechanism of exit is voluntary: speculative pressure increases domestic costs (notably unemployment), which can lead a country to choose departure rather than being mechanically expelled.
Policy implications and recommendations
- Monitor and address real wage rigidities to reduce vulnerability to asymmetric shocks and speculative pressures.
- Use fiscal policy instruments and labor market reforms to mitigate rising unemployment that could make EMU membership politically unsustainable for distressed countries.
- Recognize that maintaining economic flexibility and credible adjustment mechanisms is crucial to preserve EMU stability during transition phases.
- Consider the political economy dimension when designing entry and support mechanisms for monetary unions to prevent situations where politics precedes economic preparedness.
Subjects and keywords emphasized by the paper
- Fiscal policy, Labor, Labor market reforms, Real wages, Unemployment, Wages
- asymmetric shocks, EMU country, EMU membership, Europe, European Monetary Union, fiscal policy instrument, real wage flexibility, real wage rigidity, stability of EMU
IMF Working Paper: Real Wage Rigidities, Fiscal Policy, and the Stability of EMU in the Transition Phase — summary derived from the publication landing page.
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- Real Wage Rigidities, Fiscal Policy, and the Stability of EMU in the Transition Phase - WP/99/83