Fears that a European Monetary Union, comprising a relatively large number of countries, will result in higher unemployment and/or bigger inter-country unemployment differentials, are grossly exaggerated. This was the view of Juan Francisco Jimeno (Universidad de Alcala de Henares, Fundación de Estudios de Economía Aplicada (FEDEA), Madrid and CEPR), who spoke at a lunchtime meeting on 31 January 1997, organised by CEPR, hosted by the Spanish Chamber of Commerce in London.

Jimeno argued that, in the medium term, and in so far as it would lead to more stable monetary and non-monetary policies and to a higher degree of economic integration, EMU might have a more favourable impact on unemployment across the EU. But he also stressed that, quite apart from EMU, the fight against unemployment must involve the removal of structural obstacles to the effective functioning of national labour markets.

In elaborating on these two themes, Jimeno drew on work he had undertaken with José Viñals on a project on product market integration, labour market imperfections and European competitiveness. The project, which formed part of CEPR’s Human Capital and Mobility programme, was funded by the European Commission. Their research had led to a number of specific conclusions. First, the contrast between the persistently high and drifting European unemployment rates, and the much lower and stable rates observed in Japan and the United States, suggests that there is a significant common element in European unemployment. There are, however, two countries which are in different starting positions, namely Spain, with an extremely high unemployment rate, and Sweden, where the European common factor seems to play a less important role.

Second, the very persistent nature of European unemployment over many years suggests that it is mostly of a ‘structural’ rather than a ‘cyclical’ nature. The high degree of real-wage rigidity in most EU countries is the main source of unemployment persistence. In some countries, there is also the danger that ‘cyclical’ unemployment becomes ‘structural’ if adequate policies are not implemented. Their third finding was that several labour-market institutions may have been responsible for the less-than-satisfactory performance of European labour markets, both by contributing to sustained wage pressures, and by slowing down the speed with which wage growth decelerates in the presence of worsening economic conditions. Jimeno pointed, in particular, to collective bargaining, job security legislation and unemployment benefit systems.

The fourth point was that, in attempting to meet the Maastricht convergence criteria, there may be short-run costs in terms of unemployment, but these ought to be more than offset by the long-term benefits. Moroever, short-term costs may be lessened – in some cases even eliminated – if convergence policies are credibly implemented and, where applicable, accompanied by structural reforms in national product and labour markets. Fifth, unemployment convergence should not become an additional explicit or implicit requirement for entrance into EMU. In any event, it is clear that countries with badly-functioning labour markets, as well as worse growth and unemployment records, will have more difficulty meeting the convergence criteria.

Sixth, Jimeno noted that, despite the significant common element in the national unemployment situations of EU member states, policies to reduce unemployment remain largely the responsibility of the separate national authorities. Nevertheless, European-wide institutions can and should play a role in ensuring adequate coordination of these national efforts to fight unemployment, within the framework already established in the move towards EMU.

Finally, Jimeno argued that the pursuit of nominal convergence need not be incompatible with real convergence, provided the coordinated implementation of sound monetary and fiscal policies – aimed at achieving nominal stability – is accompanied by the introduction of appropriate structural reforms. In this regard, the further deregulation and liberalization, when necessary, of the non-traded goods and services sectors, and the redesign of labour-market institutions – such as job-security provisions and unemployment-benefit schemes – should be among the top priorities.