Successful Structural Reforms after EMU

Abstract

Policy authorities in the EU are increasingly aware of the need to remove structural rigidities, particularly in the labor market. One reason is the start of stage III of Economic and Monetary Union (EMU). With increased labor mobility, Euroland will be closer to being an optimum currency area. Another reason structural reforms are advocated in the EU is the persistently high unemployment rate in some continental countries. Structural reforms are not sufficient for smooth functioning of the EMU. Neither are they sufficient for low unemployment. But as the Netherlands has shown, structural reforms can become part of a chain that leads to low unemployment and good overall economic conditions. Given the increased awareness of the need for structural reform in the EU, we ask why this need was met successfully in the Netherlands, but not in France. We find that crisis and communication are important in getting out of a prisoner's dilemma situation. There are two ways to interpret the success in the Netherlands. One, economic crisis pushed the government, employers, and workers to communicate with each other so that they could share a common understanding of the state of the overall economy. Communication also enabled them to sign a binding agreement to cooperate. The second interpretation is that the crisis deepened to the extent that “cooperative behavior” could be sustained by selfish decision making in a repeated game. In France, a binding agreement was less feasible because the collective sense of crisis was insufficient and an effective mechanism to communicate was lacking. The start of stage III of EMU will put further pressure on member economies for structural reform. EMU may even change the structure of the payoffs so that employers and workers in France may have incentives to voluntarily behave more cooperatively. When such a change is absent, what is needed in France is a framework to enable workers and employers to communicate with each other and place sufficient importance on the future so that agreements to cooperate become binding.J. Japan. Int. Econ., December 1998,12(4), pp. 507–534.