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A DECADE OF ADJUSTMENT AND UNEMPLOYMENT IN THE EUROZONE? THE

POLITICAL AND ECONOMIC DIMENSION

Christopher A Pissarides

London School of Economics

Chair, Cyprus Council of National Economy

Single market and beyond

• The single market in Europe has been good for jobs and growth

• Trade expanded, the poorer countries caught up and internal migration removed bottlenecks

• It is essential to complete the single market in services because this is where the future of employment in Europe

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The debt crisis

• The single currency was a great idea as the next step in European integration

• But it back-fired. It is holding back growth and job creation

• Present situation very unsatisfactory: it should either be dismantled or the leading countries should do the necessary as fast as possible to make it growth- and employment- friendly

• For this we need banking and fiscal union!

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Banking union

• For a healthy future the Eurozone needs banking union – common supervisor, ECB decides what banks should be dissolved and how recapitalisation is done

• We urgently need Eurobonds and we need the European Stability Mechanism that recapitalises banks without creating unsustainable sovereign debts

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Fiscal union

• We also need fiscal union – at least some central control of individual country fiscal finances

• Fiscal transfers are already taking place, through the structural funds and the stability mechanisms

• Some control of country budgets will make them more generally acceptable and more effective

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Eurozone and the crisis

• Continuing as at present, plodding along with haphazard decision making (as in the case of Cyprus), inconsistent debt-relief policies (compare Cyprus, Greece and Ireland), policy pronouncements pushed forward only to be withdrawn when markets don’t like it (as practised by the Chairman of the Eurogroup after the Cyprus bail-in), will get us nowhere

• Fiscal austerity is destroying jobs. The rest of the world is coming out of crisis and taking on new challenges

• Europe is looking backwards and watching powerless the rising unemployment

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Unemployment in advanced countries, 2012(Eurozone in red)

NOR

SWI

JAP

NETAUS

ICE

CZEIS

RCAN

FINTUR

USAFRA EU

ESTHUN

IRE

CYPSPA

0

5

10

15

20

25

30

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Coming out of crisis

• As the European Union is coming out of the debt crisis it needs to prepare for a job-rich growth that will increase productivity and bring back the unemployed into jobs

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Infrastructure• After years of austerity and structural reform

Europe needs new infrastructure programmes

• These should be coordinated at EU level, and be outside the recurrent budget

• It needs to set up institutions to monitor competitiveness and evaluate infrastructure needs to achieve it

• The needs are different in each country – tourist projects, transport, telecommunications?

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New institutions

• A Fiscal Policy Council is needed to monitor the fiscal budgets in the Eurozone

• A Growth and Competitiveness Council is needed to evaluate the reforms needed to increase growth and competitiveness

• Approve spending that is outside the budget balance

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Labour market flexibility

• The labour market needs to be more flexible, especially in the southern countries

• Flexibility means more freedom of employers to run their business without too much regulation

• Minimum wages that are at the appropriate level to encourage labour supply but not discourage job creation

• Best job security is provided by a labour market that creates and destroys many jobs to take advantage of new opportunities, supporting large labour turnover rates

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Income security

• Income security for those between jobs is supported by the government

• It runs programmes that take over from passive support after 6-12 months

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Structural reform

• Many countries, especially in the south, still lack a flexible labour market

• Recent reforms associated with the debt reduction programmes are in the right direction but they are taking time to have a positive impact and they need the cooperation of all social partners.

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Austerity and reform

• Austerity has an immediate impact on the economy

• Its large negative effects undermine the reform programme and make it more difficult to reach the longer-term objectives

• Timing of austerity and reform is not conducive to quick recovery and growth

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Thank you!

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