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Flexibility versus Stability

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Flexibility versus Stability

A Difficult Trade-Off in the Eurozone

CEPS,

5 min read
5 take-aways
Audio & text

What's inside?

The approach to solving the euro zone’s economic problems may be all wrong.

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

The euro zone faces considerable economic and monetary pressures as the bloc recovers from the lingering effects of the financial and sovereign debt crises. European Union policy makers have exhorted struggling euro members to implement structural reforms in labor and product markets, according to the prescriptions of the economic theory on optimal currency areas. However, economists Paul De Grauwe and Yuemei Ji argue that those prescriptions may not apply to the economic and fiscal issues facing the euro zone. getAbstract recommends this timely and astute analysis of European policy options to economists, policy makers and analysts.

Summary

To tackle slow growth, high unemployment and fiscal weakness, policy makers in the euro area are promoting structural reforms to add more flexibility to national labor and product markets. Euro-zone countries have adopted these moves, which include lessening employment safeguards, more quickly than their peers in the OECD. In fact, OECD nations outside the euro area have instead been strengthening job protections since the early 1990s.

The euro-area reforms align with the optimal currency area theory, which posits that inflexibility in labor and goods markets...

About the Authors

Paul de Grauwe is a professor of international economics at the London School of Economics. Yuemei Ji is a lecturer at University College London.

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