According to the traditional 'optimum currency area' approach, not much will be lost from a
very hard peg to a currency union if there has been little reason for variations in the
exchange rate. This paper takes a different approach and highlights the fact that high
exchange rate volatility may as well signal high costs for labor markets. The impact of
exchange rate volatility on labor markets in the CEECs is analyzed, finding that volatility visà-
vis the euro significantly lowers employment growth. Hence, the elimination of exchange
rate volatility could be considered as a substitute for a removal of employment protection
legislation.