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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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