THE EURO, WAGES AND PRICES

April 1, 2009

In "The Euro and Structural Reforms," researchers Alberto Alesina, Silvia Ardagna and Vincenzo Galasso conclude that adoption of the Euro has speeded up deregulation in the nations that participate in this common currency.  While various reforms have been far more effective in deregulating product than labor markets, there are signs that wage and salary hikes eased in the run-up to adopting the single currency.  In countries preparing to enter the Euro during the period from 1993 to 1998, there have indeed been signs of substantial wage moderation and a slowing down of the adjustment of nominal wages to past inflation.  They explain this as part of the macroeconomic efforts to meet the criteria to enter the monetary union.

Other findings:

  • Product and labor deregulation are linked.
  • It is easier to change labor markets if product markets are deregulated first.
  • It is also easier to deregulate product markets, which often means layoffs at less competitive companies, if nations already have made it easier for companies to fire people and, especially, created a safety net of unemployment benefits.

This study comes at a particularly sensitive time because the current recession is boosting unemployment in EU nations that, thanks to the Euro, can no longer devalue their currencies to cushion the blow, say the authors:

  • From 1975 to 2003, deregulation took place in all 21 nations the authors studied and in every sector of the economy.
  • The group of non-EU nations (Australia, Canada, Japan, New Zealand, Norway, Switzerland, and the United States) deregulated the least, but they started the period with less regulation than the EU nations.
  • The nations that joined the EU but did not adopt the Euro (Denmark, Sweden, and the United Kingdom) deregulated the most.

Source: Laurent Belsie, "The Euro, Wages and Prices," NBER Digest, April 2009; based upon: Alberto Alesina, Silvia Ardagna and Vincenzo Galasso, "The Euro and Structural Reforms," National Bureau of Economic Research, Working Paper No. 14479, November 2008.

For study:

http://papers.nber.org/papers/w14479

 

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