Policy Research in Macroeconomics

The ECB: Draghi-ing its feet faced with mass unemployment

By Jeremy Smith

Another European Central Bank Governing Council meeting, another occasion for complacently doing nothing. No matter that the Eurozone unemployment rate has reached 12.2% in April 2013, compared to 11.2% in April 2012. No matter that unemployment is in double figures (as a %) in over half – 9 out of 17 – of the countries of the Eurozone, including three of the four largest countries (France, Italy, Spain). No matter that Eurozone GDP has fallen in each of the last 6 Quarters. The ECB washes its hands of the problem.

Here is the ECB voice of complacency, from today:

“Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information has confirmed our assessment which led to the cut in interest rates in early May. The underlying price pressure in the euro area is expected to remain subdued over the medium term. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. Medium-term inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.”

Remember, the 2% rate is not set out in the Treaties of the EU or Eurozone. It is a rate decided upon by the ECB’s Governing Council. It could decide to have, for a period, a rate of say 3%, and adapt monetary policy accordingly. It is a political choice not to do so.

And what is the rate of inflation in the EU and Eurozone? According to Eurostat’s Flash Estimate of 31st May, it is 1.4%, compared to 1.2% in April. These rates should mean that deflation is a bigger risk than any significant inflation. Yet working people across Europe are to be sacrificed on the altar of ultra-low inflation. The ECB is failing.

The legal mandate of the ECB is as follows, as set out in Article 127 of the Treaty on the Functioning of the European Union, and in Protocol No.4 on the ECB’s Statute:

“The primary objective of the European System of Central Banks [meaning, the ECB]… shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union.”

Price stability is clearly not the issue just now. The risk of excessive inflation at a time of mass unemployment is vanishingly small. So it follows that the ECB has the duty (“shall”) to support the general economic policies in the Union (not “of” the Union), to contribute to achieving the EU’s Article 3 objectives.

Article 3 of the Treaty on Economic Union includes paragraph 3 in particular provides:

“The Union… shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.

It shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child.”

Yet the Eurozone, in its current economic state , does not have balanced economic growth, full employment or social progress (au contraire!). The EU institutions together are creating, not combating, social exclusion.

Draghi’s “solution” – cut your pay and export

So what did the President of the ECB have to say about unemployment and the economy today, whilst deciding to do nothing?

Well, his main point was to tut-tut about recent decisions to enforce austerity a wee bit more slowly; the ECB:

“considers it very important that decisions by the European Council to extend the time frame for the correction of excessive fiscal deficits should remain reserved for exceptional circumstances.”

(I am not clear why he refers here to the European Council, which is the heads of government, rather than the European Commission, which this week  came out with its economic “recommendations” to Member States).

The other point of interest to Mr Draghi, in this context, is the need to implement  “structural reforms”, which should

“in particular, target competitiveness and adjustment capacities in labour and product markets, thereby helping to generate employment opportunities in an environment of unacceptably high unemployment levels, especially among young workers, prevailing in several countries. Combined action on the fiscal and structural front should mutually reinforce fiscal sustainability and economic growth potential and thereby foster sustainable job creation.”

“Target adjustment capacities in labour markets” to generate employment?  What does this mean? He spelt it out in a recent speech at a conference hosted by the City of London (23rd May):

“Narrowing the gap between labour compensation and productivity growth, also across countries, is absolutely essential for improving competitiveness in euro area countries.

The structure of labour markets in some countries needs to be reformed to allow nominal adjustments to play out, and to avoid that the weight of more flexible labour market conditions falls disproportionately on young generations.

In other words, cutting pay is the answer to unemployment! As for youth unemployment, it is structural rigidities that are solely to blame, and which are damaging the very “fabric of society” – nothing to do with the collapse of both private and public investment, and of internal demand! So:

“In particular, reforms are needed to ensure inter-generational fairness by tackling the phenomenon of ‘insiders versus outsiders’. In some euro area countries, this phenomenon is driving youth unemployment to levels that threaten the very fabric of society.”

Like Jens Weidmann, President of the Bundesbank, Draghi has a perversely uni-dimensional view – the solution is for workers pay to be cut, and for every country to export their way out of the crisis, making the Eurozone a mega-surplus bloc (and thus creating equal mega-deficits elsewhere):

“And the painful measures taken are starting to bear fruit. We see this very clearly, for instance, in the impressive improvement in export performance in Ireland, Spain and Portugal and in the recent uptick in industrial production in the latter two countries.”

Hold on!  Internal demand in Spain and Portugal has been collapsing much faster than exports have been growing; industrial production overall has scarcely “upticked” at all, whilst unemployment has most certainly “upticked”. Ireland, for a time the poster child for austerity, has also fallen back into recession.

The point about the EU was never that it was primarily an exporting trade bloc, though of course exports are important, amongst other things. The main point was to create  a balanced, common internal market, with economic and social improvements for its people.

In a recent post, we quoted Chairman Bernanke of the US Fed, who recently reaffirmed to Congress’s Joint Economic Committee that unemployment has terrible consequences, not only for the unemployed and their families, but for the productive capacity of the economy – and also for government finances.

We also quoted an article by EU employment and social affairs Commissioner Laszlo Andor and others, who rightly concluded:

“Rebalancing through aggressive reduction of government spending and similar measures in deficit countries (under the euphemism “internal devaluation”) is, without higher domestic demand in the surplus countries, a recipe for long-lasting recession and disintegration.”

The ECB, under the complacent watch of Mario Draghi (and M.Trichet before him), bears a heavy responsibility both for causing and maintaining an appallingly high level of unemployment, and failing to use the right policies to tackle it. In so doing it is promoting long-lasting economic depression and European dis-integration.

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