A Threat To Monetary Union?
One of the most puzzling developments in recent decades has been Europe's failure to generate jobs and reduce unemployment at a time when America's job performance has been strong. Whereas Europe's jobless rates in the 1960s and 1970s were consistently below those of the U.S., the opposite has been true in the 1980s and 1990s--and recently by a widening margin.
Since 1979, the U.S. economy has managed to create an eye-popping total of 30 million jobs. It has also lowered joblessness to a level that is as close to full employment as may be achievable without igniting inflation. But in Europe, net job creation has been minimal for nearly two decades, and unemployment has moved to record levels despite sluggish labor-supply growth.
The big question, of course, is why most European nations cannot get their job engines fired up--and why America can. In a recent paper in the International Labor Review, Freddy Heylen, Lucia Goubert, and Eddy Omey of the University of Ghent in Belgium suggest an answer that observers have tended to ignore: the sharp contrast in macroeconomic policies on different sides of the Atlantic.
The consensus view among economists is that industrial economies in recent decades have been buffeted by structural shifts sparked by technological advances, foreign competition, and globalization. Because of its relatively flexible labor market and wage structure, the U.S. economy was able to adjust to these shocks and continue to generate jobs. But in Europe, so the story goes, job growth has been impeded by such policies as high minimum wages and payroll taxes, restrictions on firing, and generous social benefits.
The three economists don't reject these explanations. But they note that restructuring in the U.S., which began in the 1980s, has had the benefit of stimulative macroeconomic policies during much of the past decade and a half.
Short-term interest rates, for example, trended down in the U.S. in much of the 1980s and early 1990s. And U.S. fiscal policy was highly stimulative through the mid-1980s. By contrast, European monetary and fiscal policy has been far more restrictive. Indeed, the researchers estimate that Europe's unemployment rate would have been as much as 1 1/2 percentage points lower in recent years if demand growth had matched that of the U.S. in the 1980s and early 1990s.
All of this points to a catch-22 in current European economic strategy. To join the planned European Monetary Union, governments are pursuing tight fiscal and monetary policies. They are also trying to promote job growth through benefit cuts and reforms that enhance labor market flexibility.
The problem is that such reforms are unlikely to succeed or prove politically feasible in the absence of favorable macroeconomic policies. And unless they succeed--and bring lower deficits--European nations are unlikely to meet the fiscal criteria established for EMU membership. Indeed, speculation is rife that Germany will opt for a delay in the starting time for monetary union because rising joblessness threatens to push its own deficit out of bounds.