The European Monetary Union And The Euro

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The force of the skeptics argument depends crucially on the time frame under consideration. First by removing the possibility of devaluation can a single currency condemn a region or nation to permanently higher unemployment than it would otherwise have? The answer is No. In the long-run both a nation's unemployment rate and its real exchange rate (that is the price of foreign goods and services relative to the price of domestic goods and services expressed in a common currency) are determined by the real characteristics of the economy. Thus the real exchange rate must ensure that the supply of goods and services (determined by the available technology, work force skills, etc.) must be equal to the demand for those goods and services (determined by private spending decisions and the government's fiscal policy). Similarly the unemployment rate has to balance the demand for labor by firms, which tends to rise as real labor costs fall, against the tendency for wage settlements to be ...

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by making it more profitable for exporting, and import-competing, firms to take on more labor. However, the resulting tightening of the labor market, together with the increased cost of imported goods to consumers, in due course tends to lead to higher wage settlements. And because workers care about the real value of their pay packets i.e. what their wages will buy in the shops, while firms care about their real production costs i.e. unit production costs relative to the price they can sell their output for, any competitiveness gains from devaluation must ultimately be completely wiped out through higher domestic wage and price inflation. However, this process may take some years to work ...

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