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264 Unemployment and Monetary Policy in the European Union
In contrast, in the view of many observers outside governments and central
banks (who seem to have a natural addiction for, and fascination with, imitating
Germany), current policy is actually most likely to produce disaffection with the
idea of unity, at least of the monetary kind, by giving tangible evidence of how
disastrously costly such a policy might prove. And more damage will come as
we wait for a “spontaneous recovery.”
I suggest therefore that it is time to consider some fresh approaches, beginning
with an emergency package to promptly reduce the disruptive, exorbitant rate
of unemployment, to be followed by some basic reforms of the system designed
to put an end to the “excruciating dilemma” between maintaining employment
through accommodation and risking an inflationary spiral, between floating
exchanges and fixed exchange rates with widespread unemployment.
5 What are the Remedies?
5.1 The Emergency Package
The first step is for the EMS to acknowledge that the unemployment problem has
reached crisis proportions with little prospects of a quantum improvement, at least
through the next year. This calls for prompt, emergency measures, aiming at a
step reduction in unemployment toward historical levels, while maintaining price
stability. The measures should be of two types.
i) EMS member countries (with the possible exceptions of Germany and
Holland) should agree on a program of rapid expansion of the real money supply
and sharp cuts in short and long-term interest rates, aimed at reviving demand
and reducing unemployment until it reaches some target level. To the extent that
the rise in demand turns deficits into surpluses, or reduces them drastically, there
would be an opportunity for some fiscal expansion, especially in the form of
public investments, to support the monetary policy (see Drèze and Malinvaud,
1994).
ii) Step i requires an expansion of the real money supply. But the monetary
authority can only control the nominal one. It is essential therefore to ward against
the danger that the expansion of nominal money and employment will be accompanied
by a new push for higher nominal wages, threatening a resumption of
inflation, interfering with the expansion of the real money supply and calling for
non-accommodation, and higher interest rates. The only way to eliminate that
danger is to secure the participation of labor, employers and government into an
agreement that will ensure the stability of prices. First and foremost, workers
must accept a freeze on wages (within limits consistent with the unexpired portion
of past contracts) or at the least to keep any increase within the limit of produc-