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," Mr. 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 €1.1 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?"
Write to Brian Blackstone at brian.blackstone@wsj.com
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