Wage Divergences in Euroland: Explosive in the Making

Heiner Flassbeck

Chapter 2 in Euroland and the World Economy, 2007, pp 43-52 from Palgrave Macmillan

Abstract: Abstract The European Economic and Monetary Union (EMU) faces increased international and internal scrutiny. More and more observers are asking questions about the long-run viability of a monetary system with absolutely fixed nominal exchange rates, but dramatically divergent real exchange rates. Since the start of the Union in 1999 Germany, the biggest country and the European stronghold of external stability for several decades, has decoupled from many other member countries by keeping nominal and real wage growth far below the pace expected by the partner countries and the markets. Nominal unit labour costs are the surrogate of the real exchange rate in systems of absolutely fixed nominal exchange rates: rising divergences between Germany and the rest of EMU point to an unsustainable real depreciation of the German relative cost position in a system that has abandoned the use of the exchange rate as an instrument to compensate for such divergences.

Keywords: Exchange Rate; Current Account; Real Exchange Rate; Monetary Union; Nominal Exchange Rate (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-37755-4_3

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DOI: 10.1057/9780230377554_3

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