Challenges for Successful Wage Setting in Europe

The creation of the European Monetary Union (EMU) fundamentally alters macro-economic policy-making in the eleven participating countries. The loss of the exchange rate instrument through the introduction of the single currency, the transfer of monetary sovereignty to the European Central Bank (ECB) and the budgetary discipline of the stability pact severely narrow the scope for governments that wish to address adverse economic shocks (see e.g. Bayoumi and Eichengreen (1992), Carporale (1993)). By lack of these familiar policy instruments, the focus is shifted towards wage adjustments as a means of coping with changing macro-economic conditions.