EMU and asymmetric shocks: A survey of adaptation and insurance mechanisms

The authors focus on the ways in which EMU member countries might deal with asymmetric shocks until the convergence of national economic and legal str uctures gradually eliminates related idiosyncrasies. In a discussion of nat ural adaptation mechanisms, such as labor market flexibility and relative p rice adjustments, the authors conclude that a proactive economic policy mig ht be called for. Since monetary policy may not fully consider the regional aspects, fiscal policy would come to the forefront. The operational room o f fiscal policy is limited by the EMU's Growth and Stability Pact, the auth ors contend, as they review the propositions suggested in the literature th at may guide the EMU away from,,fiscal con-federalism" toward fiscal federa lism.