EMU calls for comprehensive labour market reform

This paper deals with the interrelation between EMU and labour market flexibility in Euroland. It is shown that exchange rates between EU member states have - in various instances - played an important role as shock absorbers in the past, that asymmetric shocks are likely to be still relevant in the future and that current labour market flexibility is insufficient to cope with the EMU-enhanced need to absorb shocks. Hence, comprehensive reforms of labour market institutions are indispensable. The properties of different policy scenarios are investigated, with special emphasis on the endogeneity of OCA (optimum currency area) criteria and on the appropriate division of labour between the key actors (national governments, the EU administration, and the social partners) in the reform process.