EMU and labour Market Reform

We focus on the political economy question of how incentives to reform are likely to be affected under the unique policy regime provided by the EMU. We develop the analysis using an extended ins & outs Barro-Gordon model of inflation and public expenditure within a framework where labour market reform is endogenous and open-economy effects from fiscal policy are accounted for. We show that when the latter are sufficiently strong, traditional literature results that monetary union reduces incentives to reform no longer hold. Conversely, when open-economy effects are negligible, more reforms are delivered outside the monetary union to the extent that the outsiders' fiscal commitment problems are sufficiently severe.