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The mainstream economics view of what's wrong with the European economy and labor market probably goes something like this, courtesy of Brad DeLong:

The European Dilemma

  • Some of slow European growth should be attributed to slow population growth. Not all . . .

  • A failure to take advantage of opportunities opened by I[nformation] T[echnology].

  • Central banks believe that macroeconomic stimulus without structural reform will lead to inflation.

  • National governments believe that structural reform without macroeconomic stimulus will worsen the plight of the unemployed

  • Without macroeconomic stimulus, the demand will not exist to justify heavy investments in IT

  • Without structural reform, investments in IT will not be followed by the reconfigurations of the workforce needed to turn IT investment into a productivity booster.

So we have three interrelated problems:

  1. Slow population and labor force growth;
  2. Labor market overregulation that dulls firm incentives to hire and invest;
  3. Excessively tight monetary policy.

The first point is pretty obvious; the second and third are subject to some debate.

For example, the ECB cut short-term interest rates in 2001 and 2002-03, but they are still about the same as those in the US (in an economy that is growing more slowly), and if you also include long-term rates and the appreciating (until recently) Euro, monetary conditions are tighter in Europe now than they were 5 or 6 years ago, and tighter than in the U.S. (PDF link):

The other point, about overregulated labor markets, probably has some validity, although the evidence for it is not necessarily all that strong (PDF link), so I think it is also overemphasized. Certainly Europe does not have to abandon its' social model or the welfare state, Thatcher-style, to set things right, as many Anglo-American and/or business commentators would have us believe.

by TGeraghty on Tue Jun 21st, 2005 at 02:31:01 PM EST

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