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8
THE SHAMEFUL RATE OF UNEMPLOYMENT IN THE EMS:
CAUSES AND CURES
Franco Modigliani
1 Introduction and Summary
Europe is presently suffering from an acute attack of the worst disease that can
afflict a market economy—mass unemployment. In the 1960s unemployment
among the members of European Community (EC) was prevailingly between 2
and 3 percent. But at the end of 1994, according to the figures from the latest
Bulletin of Labor Statistics of the International Labor Officer, 1995-1, of the 11
countries now in the EC (excluding Luxembourg), only one had an unemployment
rate of less than 7 percent (Portugal), 2 had a rate of between 7 and 10
percent (Holland and Greece), while two-thirds had rates near 10 percent and
over, including the United Kingdom (10 percent), Italy (11.3 percent), France
(11.5 percent), Belgium (14.1 percent), Ireland (14.6 percent), and Spain (20
percent). A tragedy and a shame!
Jobless rates of this magnitude had not been seen before, except possibly
during the Great Depression, and even then, probably only in the United States.
Macroeconomists like me thought that we had finally come to understand pretty
well the nature of the market failure responsible for that calamity, and the cures
needed to avoid a repetition, from the teaching of the economic giant John
Maynard Keynes. And indeed, we have learned it to a considerable extent in the
U.S. Since the end of the Second World War, unemployment has barely exceeded
9 percent in only two years and then by design; since 1982 it has been consistently
below 8 percent, and mostly by substantial margins, and by this year it is
a little higher than in the 1960s, actually down to physiological levels (below 6
percent). But in Europe, with unemployment since 1982 almost uniformly above
9 percent on the average, and mostly by a substantial margin, it would appear
that at least the Central Bankers have forgotten the lesson that I have been
Reprinted with the kind permission of Kluwer Academic Publishers from De Economist 144, no. 3
(October 1996), 363–396.