Thursday, January 17, 2013

European Commission Addresses Economy

The European Commission’s 2012 report on employment and social development has impressed economists as an accurate summary of what has gone wrong with the Eurozone economy in the last year and what will become of it this year, although it’s still questionable whether the insights gleaned from the report will be used to help make the situation better. Economist Jonathon Portes’ interpretation of the report is that a lack of aggregate demand as the result of macroeconomic policy mismanagement as the source of current woes, and that the poorest countries are getting worse, even if other areas are recovering. For more on this continue reading the following article from Economist’s View. 

Jonathan Portes (he also provides discussion of each of these points):
European labor markets: six key lessons from the Commission report, by Jonathan Portes: I haven't always been complimentary about the European Commission - either its economic analysis or its policy advice. So it's nice to be able to be wholeheartedly positive about the excellent report "Employment and Social Developments in Europe 2012"...
The report is really worth reading. But it's close to 500 pages, and the main messages deserve as wide an audience as possible, so I thought I'd try to highlight them with some commentary. To my mind, the key ones are the following:
1. Economic weakness in Europe, and the consequent rise in unemployment, are mostly to do with a lack of aggregate demand, which in turn is the result of mistaken macroeconomic policies - especially aggressive fiscal consolidation...
2. Although financial markets may have stabilized - who knows for how long - things are getting worse, not better, in the real economy of the crisis countries...
3. Countries with more generous welfare states, but also more flexible labor markets, have fared best...
4. Following on from this, structural reforms in labor markets are required in many countries - but they need to be based on evidence! Segmented labor markets are a problem and raise youth unemployment...
..and even in recession, minimum wages at a sensible level do more good than harm. ...
5. Where they were allowed to operate, the "automatic stabilizers" worked...(in both macroeconomic and social terms)...
...while where they were overridden, in the pursuit of "self-defeating austerity", things have got worse...
6. Latvia, Ireland (and even Estonia) may look like "success stories" to some in the Commission, and perhaps to the financial markets (at present) but the reality in terms of jobs and incomes is rather different. ...
Too bad fiscal policymakers didn't do their homework and learn these lessons about austerity, social insurance, automatic stabilizers, and so on before putting harmful or ineffective policy in place (or failing to implement policy when action is called for, e.g. to reduce unemployment). Wish I thought they were doing their homework now.
 
This blog post was republished with permission from Economist's View.

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