Monetary Cooperation in Europe and the Problem of Differential Productivity Growth: an argument for a 'two-speed' Europe

Bob Beachill and Geoff Pugh

International Review of Applied Economics, 1998, vol. 12, issue 3, 445-457

Abstract: Cointegration analysis of a productivity-modified purchasing power parity relation supports the hypothesis that—in the long run—the nominal exchange rate adjusts to accommodate different national rates of productivity growth in the traded goods sector. Accordingly, in the long run, an absence of exchange rate flexibility combined with productivity growth differentials is likely to generate an intractable adjustment problem. Because Germany and France display a similar evolution of productivity, this analysis supports their participation in monetary union, whereas a markedly different pattern of productivity growth in the UK constitutes an argument against membership. In passing, we find empirical support for Michael Porter's hypothesis that continuous devaluation can reduce the rate of productivity growth. This also has implications for UK membership.

Date: 1998
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DOI: 10.1080/02692179800000018

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