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Supporters of a single currency argue that by permanently fixing European exchange rates uncertainty would be reduced which would stimulate trade between EU countries, while facilitating investment together with an expansion in output and employment. Whilst it is undoubtedly true that a stable environment encourages international trade and investment, experience of past quarter of a century has demonstrated that a 'dramatic' increase in internationalisation can occur without a fixed exchange rate. An exchange rate which is too rigid, over a long period, which collapse because it prevents individual economies adjusting to the divergent impact upon production and employment structure caused by external shocks and changes in the pattern of demand and specific product ranges.
If the UK joins the EU and cannot devalue and is experiencing slower productivity growth or an external shocks such as an OPEC oil price rise, it depends upon wage and price flexibility as well as labour mobility to prevent increasing unemployment.
The data analysis will include examining empirical international trade as a per cent of GDP pre and post EU for UK and other EU members. We will also provide an analysis of labour markets. We began by observing the unemployment rates within various regions of UK and Spain, especially comparative to the US. Analysis of the variability of regions indicates that labour mobility is low within European countries - where languages and cultures are relatively different. We found that a large proportion of movements in employment growth are common to all US state compared to all EU regions. Labour market distributed less symmetrically across the regions in Europe and therefore, triggers less interregional migration than the US.
Previous studies have concluded that on mobility of labour and capital criteria, Europe scores ratter poorly. Available evidence suggests that labour mobility within European nation states is one-third the level found in the USA despite the existence of greater regional inequality and unemployment in Europe (OECD, 1986; Eichengreen, 1991). A study into the US by Blanchard and Katz (1992) found that when a particular region is hit by an adverse shock a large proportion of the subsequent drop in employment is matched by labour migration. Applying the same approach to European regions, Decressin and Fatas (1995) found less labour mobility and longer-term effects on regional unemployment, confirming a similar finding by Eichengreen (1991).
The labour mobility analysis of regional variation was conducted by studying regional unemployment rates in UK over a period of time. The regions were ordered according to unemployment rate and also ranked (from highest to lowest for each period). The variability of the ranking of regions was calculated using the Spearman rank correlation coefficient. This measurement, which varies between 0 and 1, takes value 1 when all ranks remains unchanged and value 0 when the ranking is completely turned upside down.
Coefficient of rank correlation =
Where n = number of pair of data
And d = the difference between the rankings in each set of data.
Throughout the analysis we compare the results we obtained for Europe to those obtained from a similar analysis of state-specific evolutions in the US.
Table 1.0, and 2.0 in appendix 1 presents the evolution of regional unemployment rates in the UK between 1979 and 1998, and state unemployment rates within the US, 1980-98. To better read the information contained in the tables, the regions have been ordered according to the latest unemployment rates and their rank (from highest to lowest) has also been included in the tables.
Table 4.0 summarises raw unemployment differentials within the EU and US. Both the standard deviation and the coefficient of variation of unemployment rates are higher in the EU than the US. The coefficient of variation enables us to compare the dispersions of two distributions.
Coefficient of variation =
The bigger he coefficient of variation, the wider the dispersion.
Table 4.0 The US and EU12
Unemployment rate (%)
Standard deviation of unemployment rate (%)
Coefficient of variation
Source: (1) Northeast-Midwest Institute and Bureau of Labor Statistics (December 1998). (2) OECD 98, various issues. Own calculation of standard deviation and coefficient of variation
The above evidence is consistent with the view that the existence of a US currency/customs union facilitates capital and labour flows, which minimise regional problems. But it may be that the EU has recently suffered region-specific shocks larger than those experienced by the US. As single currency will abandon the adjustment that flexible exchange rate make possible, it may make it more difficult for economies to adjust to shocks.
UK would be disadvantaged by entering the Euro and implementing a single policy, as it would mean that interest rates and other monetary decisions would be taken for the currency area as a whole. There would be no separate interest rates for individual countries and national exchange rates would also cease to exist.
To ensure EMU succeeds in the long-term all participating members states must operate at the same stage of the economic cycle, otherwise entering the Euro could disadvantage the UK. Reaching that stage will represent the greatest threat to EMU.
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A very rough way to access the similarity of the business cycle is too look at the correlation coefficient for annual changes in GDP for pairs of countries. Table 6.0 shows the countries, which could form a successful monetary union.
Decressin, J., & Fatas, A., Regional labour market dynamics in Europe (1995), European Economic Review 39 pp. 1627-1655.
Eichengreen, B., Is Europe an Optimum Currency Area? (1991), Working Paper No. 3579, National Bureau of Economic Research, Inc. Cambridge.
Blanchard, O.J. & Katz, L.F., Regional Evolutions, (1992) Brookings Papers on Economic Activity, Part1, pp. 1-61
OECD Economic Outlook December 1998 & July 1991
Northeast-Midwest Institute and Bureau of Labor Statistics (December 1998)