Are labour markets in the new member states sufficiently flexible for EMU?

New Member States (NMS) coming from central planning are often advised against early Euro adoption because of their rigid labour markets. But are labour markets so rigid in these countries? We argue in this paper that this is not the case. Labour market institutions are no more “rigid” than among current EMU Members whilst wage bargaining institutions are actually better equipped for microeconomic wage flexibility than in the EU-15. NMS also achieved substantial reallocation of jobs and workers in the transition to markets, display relatively large job turnover rates and are reducing their regional mismatch. The view that NMS have rigid labour markets is fuelled by the low job content of growth in the region. But there is evidence that the latter is related to productivity enhancing job destruction in the aftermath of prolonged labour hoarding. Reduced-form employment equations estimated in this paper also suggest that tight fiscal policies, rather than being harmful to job creation, may actually improve the employment performance of the region. Our interpretation of this result is that loose fiscal policies weaken the confidence of investors and crowd-out private employment growth through generous pay rises to civil servants.