SINTRA, Portugal-High and divergent unemployment rates in Europe pose a serious threat to the region’s long-term economic health, central bankers and economists warned during a weekend conference held by the European Central Bank.
But they stopped short of offering specific advice on the best steps to take.
The ECB’s seminar, the second of what it plans as an annual conference in the resort town of Sintra on Portugal’s western coast, brought together central bankers and economists from Europe, the U.S. and Asia to examine the root causes of high unemployment and persistently weak inflation in Europe.
The attendees dwelled extensively on an economic concept known as “hysteresis,” a reduction in economic output brought on by weak growth that gives rise to long-term unemployment. The remedies to such problems, however, lie partly with fiscal-policy officials and not central bankers, who don’t set labor and other economic policies. The conference largely lacked representatives from finance ministries and businesses.
But ECB President Mario Draghi signaled that the stakes were too high for central bankers to keep silent, particularly in the 19-member eurozone, where diverse countries ranging from powerful Germany to recession-ravaged Greece set their own economic and fiscal policies but share a single currency and monetary policy.
“In a monetary union you can’t afford having large and increasing structural divergences between countries,” Draghi said on Saturday. “They tend to become explosive; therefore they are going to threaten the existence of the monetary union.”
The eurozone is the world’s second-biggest economy after the U.S. But in recent years it has emerged as one of the global economy’s main trouble spots, having struggled through a pair of recessions since 2009 that pushed the bloc’s unemployment rate into double digits. The region has started to recover, but the damage has resulted in huge gaps in unemployment across the eurozone.
“Unemployment in Europe, notably youth unemployment, is not only unbearably high. It is also unbearably different across nations belonging to an economic and monetary union,” Tito Boeri, professor at Bocconi University, and Juan Jimeno of the Bank of Spain wrote in a conference paper.
The ECB stepped up its response to economic stagnation and too-low inflation by launching in March a EUR1.1 trillion ($1.21 trillion) bond-purchase program, following similar policies–known as “quantitative easing”–that have been pursued by central banks in the U.S., U.K. and Japan. But flexible labor and product markets are needed to channel these easy money policies in new activity, and conference speakers generally agreed that more action is needed on this front especially in Europe.
Another message from the two-day seminar was that while the ECB only targets stable inflation defined as annual consumer price growth near 2%–unlike the Fed, which also has a mandate to maximize employment–the ECB and other central banks should take unemployment into greater account in part to keep super-low interest rates and other accommodative policies from simply driving asset prices higher at the expense of savers and widening inequality.
Meanwhile, in a conference paper, International Monetary Fund chief economist Olivier Blanchard highlighted the challenge facing policy makers to meet their inflation objectives at a time when the influence of the gap in economic output brought on by recessions has only a small effect on consumer prices.
“What we have observed is an increase confidence in the central bank meeting its inflation target, while at the same time, the ability of the central bank to achieve that target has steadily decreased,” he wrote in a paper with Harvard professor Lawrence Summers and IMF economist Eugenio Cerutti.
Despite broad agreement on the urgency to generate lasting growth and remove barriers to employment, specific solutions were scant at the ECB conference, underscoring the difficulty in turning ideas to improve productivity into specific proposals that can pass national parliaments.
For example, Christoph Schmidt, the head of Germany’s Council of Economic Experts, said that Germany’s success during the crisis in protecting jobs by switching workers to reduced work time arrangements wouldn’t necessarily apply to other European countries, because German industries were still highly competitive despite the negative output shock in 2009.
“I don’t think other member states would be well advised to pursue this same strategy of protecting jobs,” he said.
Meanwhile, euro member Ireland’s central bank governor, Patrick Honohan, warned against interpreting his country’s recovery from a severe recession as “a super productivity, super competitiveness story.”
He also stressed the importance of speaking clearly about what is meant by structural reforms without slipping into economic jargon that can be patronizing to the public.
“When we talk about labor market flexibility are we sure we’re not just talking about low wages?” he asked. “When we talk about dismantling [employment] protections…protections for whom?”