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226 Unemployment and Monetary Policy in the European Union
The high value of the dollar is the result of the strength of the American economy
achieved through a policy of full employment pursued with “benign neglect” of
the international “pecking order.” The ECB must adopt the same attitude of
independence aiming at fostering an economy as vigorous and prosperous as the
American economy.
The awesome responsibility of the ECB for maintaining high growth in Europe
have become even more serious with tragic events of the last few weeks in Asia,
and Russia and the sharp set back in the equity markets. It is up to the ECB and
to Europe with its still sound fundamentals to engage in a policy of supporting
domestic investment and demand offsetting the expected decline in net exports.
5.2 Supply Side Measures
We do not believe that a widespread liberalization of the labor market in Europe,
along the lines of that existing in the American or Japanese labor markets, is
advisable, even if it were feasible. It is important to keep in mind that the present
European welfare systems spring from different cultures and from different ways
to interpret the solidarity and equality principles. However, we think that, in order
to fight unemployment, it is necessary and feasible to introduce a substantially
higher degree of flexibility in the European labor and product markets including,
where necessary, a relaxation of job security legislation, a reduction in the coverage
of collective bargaining agreements, and a reduction of barriers to entry of
firms and of barriers to geographic mobility of labor. We believe that if such measures
are combined with the reform strategy outlined below, both the efficiency
and equity of European labour markets can be improved. The economic instruments
now available in many European countries to pursue these efficiency and
equity goals are insufficient. The portfolio of policy instruments needs to be
expanded, along the lines suggested hereafter.
The labor market flexibility policies, unlike the macroeconomic management,
cannot be uniformly adopted by all the European countries; on the contrary, they
should be adapted to the different situations of each country and region. We begin
by recalling that an important aspect of European unemployment is found in the
regional differences that characterize this phenomenon. We believe that one
important source of differential unemployment within countries is the uniformity
of wages imposed by unions or custom in national negotiations, disregarding
the glaring fact of important regional differences in productivity. We are in agreement
that to remedy this problem requires recognizing the need for regional differentiation
in labor cost per hour reflecting regional differences in productivity.
But in order for these reforms to obtain a large social consensus, it is necessary
that they be accompanied by measures that compensate for their negative effects
on income distribution. In fact, it is evident that fundamental labor market reforms