Does Germany’s special situation pose a risk to the euro? The findings of the latest Pew Research Center survey paint an impressive picture of the economic divergences within the euro area. We compare the economic development of the euro-area member states with that of the US federal states over a longer time horizon. While we find no significant differences between the euro-area members and the US states in terms of growth and inflation, unemployment rates differ considerably more in the EMU countries. This suggests that local labour markets are more flexible in the US than in Euroland, and that labour force mobility is higher state-side. Provided there is sufficient political will, labour market reforms could create greater incentives for increased cross-border labour mobility. Moreover, labour market reforms boost labour market flexibility as a whole – with Germany’s Hartz reforms representing a case in point. Greater flexibility regarding wages and employment would in turn reduce the need for adjustment via cross-border labour mobility and thus take some of the pressure off migration, which is hampered by language barriers anyhow.
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Deutsche Bank