EMU’s small contribution to job creation

Date: 30/10/1997

IF ALL goes well in its first years, economic and monetary union in Europe should be a catalyst for job creation.

That is about as precise as anyone can be, although this has not stopped the euro-advocates and their enemies. All sorts of claims and counter-claims have been made for EMU, from costing 10 million jobs to creating 15 million.

In fact, EMU itself will do very little directly. If it goes ahead with the 'core-plus' countries - Germany, France, Belgium, the Netherlands, Austria, Luxembourg, Finland and Ireland - the simple locking of exchange rates will just recognise what has already happened.

If it goes ahead with Italy, Spain and Portugal as well, then preventing these countries' policy-makers from ever devaluing again should have profound effects on their labour markets.

In the short term, jobs could be lost, but they will then be regained as northern European manufacturers see the attractions of investment in Iberia without the currency risk.

The major difference between Europe's EMU and that other great monetary union, the United States, is the immobility of labour. When recession hits Pennsylvanian heavy industry, the newly unemployed are prepared to up sticks and move their families thousands of miles to Texas or California to find work.

A study by Olivier Blanchard and Lawrence Katz of the Massachusetts Institute of Technology found that during the first year after an economic shock to a US state, half of the required adjustment to the local labour market was made by workers emigrating to another state.

This simply does not happen on anything like the same scale in the EU. Coalminers whose pit is closed down in northern England do not pack their bags and head for Germany or Spain, and neither are steelworkers at Forges de Clabecq in southern Belgium thinking about emigrating to booming Ireland or the UK to find new jobs.

Even with the rapid growth in the use of Spanish in the US, English remains the common language. Qualifications are recognised in every state, pensions are portable, residence permits are not required. In short, crossing a border is easy.

Beyond this, economists have been able to show with some certainty that having EMU is preferable to having a semi-fixed system along the lines of the Exchange Rate Mechanism (ERM).

Nigel Pain and Ray Barrell, from the UK's National Institute for Economic and Social Research, drew up models to measure the comparative efficiency of EMU and the ERM in dealing with a sudden economic shock such as German reunification.

“Based on our simulations, we concluded that life would be much better under EMU than under the ERM because, rather than being dominated by the Bundesbank which takes decisions based on German conditions alone, you would spread the cost of one-off shocks across Europe,” says Pain.

Nevertheless, he admits that the single currency will not have a fundamental impact on unemployment on its own. “EMU is not going to help reduce the equilibrium level of unemployment in Europe,” he says. “That will remain the domain of national policy-making.”