Employment Regimes, Wage Setting, and Monetary Union in Continental Europe

Abstract

Bob Hancké argues that Europe can be divided into two basic employment relations systems. Northern European coordinated market economies (CMEs) are characterized by strong labour unions and employer associations who link wages to productivity gains and propagate these wage rates to the rest of the economy. The mixed market economies (MMEs) of southern Europe are associationally weaker and the state compensates by intervening in wage determination and labour market protections. Within the same monetary regime, the employment systems of northern Europe were better at maintaining competitive unit labour costs. Hancké argues that these structural differences are the key contributing factor to growing current account imbalances within Europe and, directly and indirectly, to the sovereign debt crisis. Given the political resistance to radical labour market deregulation in MMEs, and the near impossibility of constructing centralized wage setting systems a la CMEs, the eurozone’s long-term solutions lie not in fiscal austerity but in a macroeconomic policy that equalizes growth and inflation rates across the zone (e.g. through fiscal union).