EUROPEAN ECONOMIST Europe May See High Levels Of Unemployment Continue
May 08, 2011
Will the unemployment problem in Europe stay for a while? And when will the rates start easing? There will be a pickup in employment because of the cyclical element no later than 2013. Next year is a little bit early. It will be better thereafter, but Europe will still be below potential output. However, unemployment will not go to historical low levels even after 2012 because we still have to cope with significant structural problems. In the short term, we have two offsetting effects. Structural adjustment will increase unemployment and the pickup in the economies will reduce unemployment. So, it is difficult to say over a one-year time horizon which one will prevail. I would not expect to see significant changes in the unemployment rates because of those two offsetting effects. And the governments are limited by European monetary union and the Maastricht treaty criteria? That is exactly right. No stimulus can be given on the fiscal side. The monetary stance in Europe is dictated by Germany. The only possibility for Europe to become monetary expansionary would be if Germany were to ease interest rates. Despite the recent base-rate cut by the Bundesbank, Germany doesn't seem to be inclined to go further. In any case, monetary policy can only ease the pain. The market will continue to force structural adjustment that will, at least temporarily, reduce jobs. Do you expect more protectionist pressure as a consequence of high unemployment? There will be more pressure. But as experienced in the past, whenever we have a structural problem of this nature with open markets and competition, it is ultimately the market that will dictate what will happen, unless you close the economy. And there is no question that our economies will be kept open, even though tension between employers and the employed will increase. What happened in the U.K., where labor unions once were strong but there was labor market deregulation, will happen in (continental) Europe. What about wages and productivity? It is simple. The structural change is forced by new markets joining the world. There is a huge inflow of labor but little inflow of capital from eastern Europe and such formerly closed markets as China and India. And theory is saying clearly that in these conditions wages will decline and productivity of capital will increase. That is something we are already observing in some professions and jobs, such as science and computer-related jobs. The salary gap between, say, computer specialists in Europe and in India will narrow. For those jobs where high mobility exists, even virtual mobility because of the falling costs of communications, we shall see a decline in real wages in industrialized countries. Will the structural adjustment be completed by, say, the year 2015? Companies and capital markets will have to adjust because markets will force them to do so. The restructuring of companies, that actually should be nearing completion by the year 2015. The companies will adapt by then. Whether the unemployed can adjust by that time is difficult to say. That depends on the deregulation of labor markets and the flexibility of our labor forces. And the older part of the labor force might not be able to adjust that quickly and be flexible in their working habits. If we don't subsidize unemployment too much, and with a younger generation coming into the market, it might be possible to have the labor market reasonably adjusted by the year 2015. But the companies will have finished adjustment? Oh, definitely, they'll adjust. Otherwise they'll go bankrupt and vanish. Which companies will adjust better? First of all, those that are exposed to international competition. And second, profit-oriented companies, where no conflict between shareholders and management exists, so that both are all pulling on the same end of the string. Those companies will adjust more rapidly. Will Europe be priced out of manufacturing? You have to differentiate between products. Europe will be definitely priced out of the production of cheap mass products and they will vanish. But there are some products where Europe will retain a competitive edge, especially with high-value-added products and high technology products, where quality and time of delivery matters. We therefore still have a future in manufacturing, but not in all products. The service sector will increase, and the manufacturing sector will decline.
