"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

270 Unemployment and Monetary Policy in the European Union
This brings out the fact that for a country (or more precisely its labor) there is
a trade-off between the growth of the real wage and the rate at which it chooses
to gain competitiveness and reduce unemployment; and on this point one can
expect with great probability, a conflict between the employed, on the one hand,
who presumably will be primarily interested in obtaining the highest possible
increase in real wages through revaluing or minimizing any devaluation of the
real exchange rate, and the unemployed workers and the net exporting sector on
the other hand, that stand to gain from devaluation. For this reason, I suggest that,
especially when unemployment is high and has been long-lasting, the unemployed
should be invited to participate in the decisions, at least at the level of
setting the desirable real rate of depreciation.
There can be little doubt that the approach suggested would increase employment
in the devaluing countries, in particular through increased net exports. But
will it not increase unemployment in the countries asked to accept a relative revaluation,
e.g. by reducing net exports? The answer is definitely not, provided the
monetary authorities make sure that the interest rates common to all countries
decline properly by an appropriate expansion of the real money supply. If that is
done, the resources released in Germany, plus any resources that might have been
“idle” before, should be reabsorbed in Germany by a large expansion of demand.
First, there should be a hefty increase in consumption spurred by the increase in
real income resulting form the gains in terms of trade and by the expansion of
employment. In addition, there should be a strong expansion of investment
induced by the fall in interest rates and the rise in income, particularly in the case
of inventories. At the same time, as pointed out earlier, the expansion of income
in other countries, arising from the larger investments in net exports, fixed capital
and inventories, will reduce the amount of transfer or net exports needed to return
to full employment.
It seems quite likely that by the end of the adjustments described above, many
economies would have undergone significant changes in the structure of production
and employment. Such changes, while desirable from the point of view of
efficiency, should be allowed to occur, but gradually. For this reason among other
things, the adjustment of the real exchange rate should be programmed to occur
over an appropriate span of time.
But the central banks should understand that a very substantial expansion of
the real money supply will be required to finance the expansion in the volume
of transactions plus a substantial decline in interest rates. It is above all the
Bundesbank which needs to understand and accept the policy needed to keep the
EMS together. Perhaps the best hope is through some kind of central bank not
dominated by Germany.