The Interpreter hasn't had much to say about European growth for a couple of years, mainly because there hasn't been much of it. European Central Bank President Mario Draghi brought this melancholy story up to date at the central bankers' annual get-together at Jackson Hole, Wyoming, last week, far from the bustle of the financial markets. The bankers have exhausted the usual topics of monetary policy at past meetings; this time their focus was on labour markets.
The graph below shows the starting point of Draghi's narrative. US unemployment rose much more sharply than Europe's in the first phase of the 2008 crisis, but US unemployment came down substantially while European jobless rates continued to rise.
Most of this difference reflects the second wave of the crisis which hit the European peripheral countries (starting with Greece) at the beginning of 2010. But the overall euro-area unemployment rate of nearly 12% is not just a reflection of 25% unemployment in Greece and Spain. With the exception of Germany, none of the core European countries has had any recovery to speak of, with employment lower and unemployment substantially higher than before the crisis. The table below (source) shows the percentage change in GDP, employment and unemployment between the pre-crisis peak and the first quarter of 2014: [fold]
What is to be done? Draghi's answer is 'a bit of everything'. He'll keep monetary policy loose (and presumably do 'whatever it takes' if the euro comes under threat). But he is looking for help from fiscal policy and structural reform. A call for structural reform (ie. productivity improvement) is a standard element of just about any macro-economic prescription, but it carries more weight and urgency given the duration and depth of the European recession.
Draghi quotes figures showing that European structural unemployment (the part that can't be fixed just by getting economic activity back to full capacity) as having risen from 8.8% in 2008 to 10.3% in 2013 as a result of the crisis and the lacklustre recovery. This would imply that the usual instruments of counter-cyclical macro-policy can't take the unemployment rate down very far.
He reports that Ireland has done better than Spain in terms of wage flexibility, but Ireland's main method of getting its unemployment rate down has been emigration, not only of disenchanted Irish youth but also the migrants from other parts of Europe who had flocked to Ireland when it was the Celtic Dragon, before the crisis.
Even this dismal litany doesn't complete the list of problems facing Europe. The European banking system is undercapitalised and in no position to support a strong recovery. And the unsustainable debt burdens on the peripheral countries make it most unlikely that a recovery can occur in these countries without a substantial additional debt write-off.
Draghi (and others) are giving more attention to the possibility that Europe may be facing secular stagnation of the sort demonstrated by Japan over recent decades. This is not a novel idea, but its revival is gaining wider attention, including in this comprehensive e-book from Vox-EU.
Just as a postscript on the Draghi speech, his presentation contrasted to the typical central banker's view, which is interested in the labour market only in as far as it affects inflation. Draghi began his speech by sounding, well, human:
No one in society remains untouched by a situation of high unemployment. For the unemployed themselves, it is often a tragedy which has lasting effects on their lifetime income. For those in work, it raises job insecurity and undermines social cohesion. For governments, it weighs on public finances and harms election prospects. And unemployment is at the heart of the macro dynamics that shape short- and medium-term inflation, meaning it also affects central banks. Indeed, even when there are no risks to price stability, but unemployment is high and social cohesion at threat, pressure on the central bank to respond invariably increases.