On the Role of Labour Market Reform for the Enlargement of a Monetary Union

This paper studies the incentives to join a monetary union, and the incentives to reform within a monetary union and within the candidate countries, respectively. We present some “orders of magnitude” evidence on the size and balance of the incentive effects for joining and being joined, and on the desirability of reform in and out of the existing EMU in Europe. It is found that countries will only want to join a monetary union where there has been sufficient labour market reform, and where labour markets are more flexible than their own. But existing members will want the same properties of their new partners as well.