European Integration: Some stylised facts



Mobility of capital and labour: Looking upon factor mobility capital has become
more and more mobile in resent years in a European as well as in a global
perspective. Thus lack of capital mobility represents no problem to the EU. Quite
the contrary story has to be told concerning the mobility of labour. Within the
union this mobility between members is remarkable low, and it seems fair to
conclude that it will be impossible to solve any sincere problem of stabilisation in
output and employment through migration between countries in the euro area. If
labour mobility were much easier unemployed persons could migrate from regions
and countries with failing demands to other regions and countries with increasing
demands, thereby ameliorate the effects of an asymmetrical shock on the rate of
unemployment and, as a consequence of this, the need for implementing an
independent economic policy action (monetary and exchange rate wise).

Wage and price flexibility: If labour does not migrate, wage flexibility may
dampen the negative effects of asymmetrical shocks, as pointed out by Friedman
(1953) among others. By reducing the nominal rate of wage inflation, regions
within the union with a higher rate of unemployment than average should be able
to gain competitiveness vis-à-vis other regions and thereby be able to stabilise
their level of employment. The absence of an independent monetary and exchange
rate policy in the euro area therefore increases the need for flexible and well-
functioning labour markets in the participating countries. Looking upon the
evidence labour markets in several member states seems to be relatively inflexible
compared to for instance the USA.

Fiscal integration: Considering the pros and cons of establishing a monetary
union, Kenen (1969) has pointed out the importance of fiscal policy integration. If
a strong element of federal fiscal policy is established, where the union as an
institution can collect taxes and make expenditures, the negative effects of an
asymmetric shock is minimised. For those regions that experiences negative
effects steaming form asymmetric shocks, the federal tax payments to the union
are reduced at the same time as the federal transfers increases. Such regions
thereby become fiscal net-beneficiaries. The opposite is true for those regions that
experience positive effects from asymmetric shocks, as their net payments to the
union increases. Federal fiscal policy will thus add an element of solidarity to a

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