The Single European Currency and implications of labour market imperfections

Abstract

Britain’s decision to reject membership of a Single European Currency – the Euro – remains a focal point of contemporary political and economic debate. Both the Danish vote to reject the Euro and the latter’s slide in value have resulted in some anxious moments for those politicians and commentators who previously confidently predicted a rosy future for European monetary integration and stronger trade patterns. At a time when Britain still ponders over the decision of whether or not to join “Euro land” some serious questions need to be asked about the Single Currency’s impact on future economic prosperity, growth patterns and employment. This paper concentrates on monetary adjustment mechanisms in the absence ofa flexible exchange rate regime. It addresses the potential implications of productivity differentials and labour market imperfections, particularly by reference to a lack of European labour market mobility and the impact of European productivity differentials. Using particular aspects of the Scottish labour market, the paper concludes with an assessment of the Single European Currency’s impact on the Scottish economy and highlights the importance of “tradable skills” rather than mobile workers.