Interdependency and adjustments in the European Union

Jacques Mazier and Sophie Saglio

International Review of Applied Economics, 2008, vol. 22, issue 1, 17-44

Abstract: Since the euro was launched, divergences in European economies'evolutions have been more significant than generally expected. The article, based on a multinational macroeconomic model describing the interdependence between 14 European countries, examines the role played by relative-price adjustment mechanisms and difficulties inherent in asymmetric evolutions. The efficiency of relative-price adjustment mechanisms seems limited and, even in the most flexible countries, the return to equilibrium is slow and still incomplete after 10 years. Differences in relative-price adjustment mechanisms remain a source of asymmetries between member countries. Extra-European exchanges have a stabilizing role which is uneven on account of trade openness and price elasticities. A decrease of the world demand and a depreciation of the euro, still have an important impact with significant disparities between countries. Several lessons can be drawn in terms of economic policy. A more restrictive European fiscal policy proves more costly in the long run in Germany and the Netherlands on account of the weakness of price compensation effects. On the contrary, thanks to their greater flexibility, the United Kingdom and Sweden can offset an initial negative shock more rapidly. The wage dimension in the definition of a good European policy mix has also to be examined.

Keywords: Monetary union; asymmetries; prices adjustments; exchange rate (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (20)

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DOI: 10.1080/02692170701745879

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