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1 J. Int'l Trade L. & Pol'y 5 (2002)

handle is hein.journals/jitlp1 and id is 1 raw text is: JOURNAL OF INTERNATIONAL TRADE LAW & POLICY THE SINGLE EUROPEAN CURRENCY AND IMPLICATIONS OF LABOUR MARKET IMPERFECTIONS Thomas Lange* ABSTRACT Britain's decision to reject membership of a Single European Currency - the Euro - remains a focal point of contemporary political and economic debate. Both the Danish vote to reject the Euro and the latter's slide in value have resulted in some anxious moments for those politicians and commentators who previously confidently predicted a rosy future for European monetary integration and stronger trade patterns. At a time when Britain still ponders over the decision of whether or not to join Euro land some serious questions need to be asked about the Single Currency's impact on future economic prosperity, growth patterns and employment. This paper concentrates on monetary adjustment mechanisms in the absence of a flexible exchange rate regime. It addresses the potential implications of productivity differentials and labour market imperfections, particularly by reference to a lack of European labour market mobility and the impact of European productivity differentials. Using particular aspects of the Scottish labour market, the paper concludes with an assessment of the Single European Currency's impact on the Scottish economy and highlights the importance of tradable skills rather than mobile workers. A THEORETICAL EXPLANATION OF EXCHANGE RATE ADJUSTMENT AND DIFFERENTIAL PRODUCTIVITY GROWTH In order to bring structure to the discussion, flexible exchange rates and their responsiveness to different productivity rates will need to be examined. First, the circumstances that lead to exchange rates responding to differential productivity growth are explained. It is possible to advocate at least two theoretical arguments in support of the hypothesis that differences in the growth of labour productivity influence exchange rates (Beachill and Pugh, 1998). The first argument has been made by such international economists as Balassa (1964) and Samuelson (1964) and can be applied to a purely competitive environment. The Samuelson- Balassa effect is an established part of the international economics literature and arises from the distinction between traded and non-traded goods sectors in open market economies. The former consists of industries producing importable and exportable goods (e.g., manufacturing) while the latter embraces goods, which are traditionally not in competition with foreign output (e.g., personal services and construction).1 5 Professor of Economics and Management, Academic Director of the North East Wales Institute of Higher Education. 1 Possible exceptions to this rule apply to personal services, which can be offered by using Internet services. Under such circum- stances a scenario of international competition may arise. VOLUME 1 NO. 1 OCTOBER 2002

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