European Network of Economic Policy Research Institutes Occasional Paper No. 1, 52 pages
Since the advent of the euro, Europe or rather the European Central Bank (ECB) has had to deal constantly with a dilemma: monetary policy has been unified, at least for the 12 member countries of the euro area, but labour markets have not. At the same time, the strictures of the Stability and Growth Pact mean that for many countries fiscal policy is no longer available as an instrument to stimulate output and employment. This renders the ECB’s problem even more acute, because it increases the burden on monetary policy to get the economy going, while it is faced with countries that are clearly asymmetric in terms of their labour markets. Thus their need for or their benefits from a more expansionary monetary policy are likely to differ considerably.