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EMU and Economic Policy in Europe

The Challenge of the Early Years

Edited by Marco Buti and André Sapir

EMU is a completely new policy regime which has significant economic implications and which, it is hoped, will ultimately enhance the role of Europe on the world stage. EMU and Economic Policy in Europe takes stock of the initial experiences of EMU and assesses the challenges which will have to be addressed in the early years of its existence to ensure its long-term objectives are successfully achieved.
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Chapter 11: Wage Discipline in EMU. A Feature of the Early Years. Only?

Karl Pichelmann


* Karl Pichelmann** 1. INTRODUCTION The formation of EMU has been expected to exert a profound impact on the actors in the market, in particular affecting price setting and wage bargaining behaviour of economic agents in a macroeconomic environment characterized by a single, stability-oriented monetary policy for the euro area and sound national fiscal policies in accordance with the provisions of the Treaty and the Stability and Growth Pact designed to avoid any conflict with monetary policy.1 The debate about the likely impact of EMU on wage formation has centred around three different, though interconnected, aspects: (i) the necessary degree of nominal wage flexibility to compensate for the loss of the exchange-rate instrument; (ii) the direct impact on the wage-setting curve and, thus, on equilibrium unemployment; and (iii) the impact on labour market institutions, in particular wage bargaining mechanisms. It has been widely held that, in general, EMU should provide improved framework conditions for employment-compatible wage bargaining behaviour as the link between wage and employment trends becomes more evident and stringent. And indeed, recent years have seen an impressive degree of wage discipline in the euro area. Nominal unit labour cost inflation has quickly fallen within the bandwidth compatible with the price stability goal of the ECB, and the decline in nominal unit labour cost growth has been even sharper than the corresponding fall in price inflation. Against this general background, the purpose of this chapter is to provide a brief assessment of wage developments in...

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