Author Question: Given that labor remains relatively immobile within Europe, the European Union's success in ... (Read 177 times)

asd123 · **on:** Jun 30, 2018

Given that labor remains relatively immobile within Europe, the European Union's success in liberalizing its capital flows may have worked perversely to worsen the economic stability loss due to the process of monetary unification. Discuss.

What will be an ideal response?

Question 2

Explain why the European Union's current combination of rapid capital migration with limited labor migration may actually raise the cost of adjusting to product market shocks without exchange rate change?

What will be an ideal response?

heinisk01 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Probably right. This is another example of the theory of the second best. If the Netherlands suffers an unfavorable shift in output demand, Dutch capital can flee abroad, leaving even more unemployed Dutch workers behind than in the case of government regulations that were to hinder the movement of capital outside the Netherlands. Severe and persistent regional depressions could result, worsened by the likelihood that the relatively few workers who did successfully emigrate would be precisely those who are most skilled, reliable, and enterprising.

Answer to Question 2

If the Netherlands suffers an unfavorable shift in output demand, Dutch capital can flee abroad, leaving even more unemployed Dutch workers behind than in the case of government regulations that were to hinder the movement of capital outside the Netherlands. Severe and persistent regional depressions could result, worsened by the likelihood that the relatively few workers who did successfully emigrate would be precisely those who are most skilled, reliable, and enterprising. This is another example of the theory of the second best.