European countries have progressively integrated from the point of view of trade and investment and have a common currency now. Labour market and fiscal institutions have largely retained their national status until now, but changes are on the way. On one side, European unions have committed themselves to the aim of achieving increased employment and purchasing power through cross-border co-ordination of bargaining policy (see the Doorn declaration of September 1998).
On the other side, the Lisboa European Council (March 2000) for the first time has indicated common targets in terms of growth and employment. This, while allowing for co-operation of fiscal authorities respectful of the Growth and Stability Pact, raises the question of a possible conflict with the pre-eminent objective of the European Central Bank, i.e., price stability.
In more general terms there are a number of policy questions that involve interactions between the different institutions operating in a monetary union such as the European Monetary Union. Among them there are the following ones:
- a) the possibility for trade unions of internalising external effects stemming from wage setting in a national context;
b) the possibility for governments of internalising macroeconomic spillovers deriving from public expenditure at a national level;
c) the interactions between fiscal and monetary authorities.
Question under a) has to do with the (dis)advantages of various levels of centralised bargaining, from complete decentralisation to complete centralisation. These have been the object of an extensive literature at least since Bruno, Sachs (1985) and Tarantelli (1986), but mainly in a closed economy setting. Calmfors, Driffill (1988) and others emphasise the effects of the degree of centralisation of wage bargaining. According to Calmfors and Driffill, there is wage restraint in economies with an extreme degree of decentralisation or centralisation. Complete decentralisation (wage bargaining at the firm level) would ensure a nominal wage restraint and a higher employment level through the effects of competition between unions. The foundation of co-operative wage determination or complete centralisation, i.e. wage bargaining at the level of the whole national area, derives from the possibility to internalise the effects of wage setting at the level of each single region, industry or firm on the consumer price index (CPI) of all the regions, industries or firms of the national economy. This would have the same result as complete decentralisation on wages and employment.
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