Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: Primary goal of stabilization policy in the Treaty of European Union is price stability. That goal may be in conflict with the goal of full employment in the member states, particularly, then the union are hit by an asymmetric shock. Assuming perfect capital mobility a initial adverse shock (Krugman 1993) may have permanent effects by releasing a self-reinforcing process, which will result in lower relative growth. Given the specification of a model that captures the crucial element of efficient structural transformation it is easy to conclude the lack of necessary structural transformation within EMU. In addition, the basic foundation of economic policy by EMU, as manifested by the Treaty of European Union, is by latter research put into question. Therefore this paper suggest, it is necessary that the Treaty of European Union must be supplemented, changed, or both.

Keywords: European Monetary Union; Structural flexibility; Optimal transformation; Phillips curve; Maastricht Treaty; Stability and Growth Pact.

JEL-codes: E42; F02; R12

15 pages, December 4, 2002

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