Introduction

The issue of structural reform is, perhaps, the leading economic policy issue in Europe. But enlargement of the EU and the euro zone must be the other. On one hand, it is widely argued that structural reform is a prerequisite for a successful currency union. Moreover, since the European economies appear less reformed in market flexibility terms than their American counterparts, efforts to restore the value of the euro vis-à-vis the dollar have been associated with the need for higher productivity and more flexible labour markets in Europe. But structural reform also plays a role in the context of EU enlargement. Here the issue has generally been seen as a question of whether, or at what pace, a less reformed candidate country would be able to meet a certain set of entrance criteria before being let into a better reformed union.

While there is little disagreement that monetary unification and structural reform are related, the nature of this relationship is not well understood. For example, the blueprint for EMU (Delors Report 1989) stressed the importance of parallelism in the monetary and economic policy spheres towards monetary union. This approach assumes economic structures to be exogenous, and changeable only through economic policy reform. Such reforms are then seen as necessary to ensure that economic structures are similar across member states. But others (e.g. Frankel and Rose 1998) have pointed out that economic structures might be endogenous, at least up to a point.