Super Mario: unemployment the unavoidable price
I’ve been off* in Frankfurt for a couple of days. Amid the post autumn statement fun you may have missed an important downgrade of forecasts for the eurozone and German economies. This will weigh on Britain, increasing the likelihood of a triple dip, and yet worse fiscal figures at Budget time.
I got to question ECB President Mario Draghi about whether unemployment was a price worth paying for keeping the euro on the road. Last week, eurozone unemployment reached a new record. My choice of words was very deliberate.
During the Thatcher economic reforms, Eddie George said yes to that question. Mr Draghi almost said yes, in the end settling on a revealing response: ultimately it was the fault of eurozone governments for “poor policymaking” in the run-up to the crisis, but these policies are “contractionary in the short term” leading to unemployment. This is “a hard price to pay but it is unavoidable”.
Myself: “Unemployment has reached a record high in the euro area. What is your response to obviously the army of unemployed and youth unemployed now in the euro area? Is this a price worth paying for the structural adjustment that you think is necessary to make the euro work?”
Draghi: “It is hard to say whether it is a price worth paying.
“This question should rather be addressed to the policy-makers that created this situation to begin with. Let us not forget that we are in this situation, which I term “a bad equilibrium”, because of the poor policy-making, or the lack of policy–making, in the years before the crisis.
“The crisis has simply highlighted these disequilibria that already existed. It has highlighted that our banks were not properly capitalised. It has highlighted that the budgetary and debt positions of our governments were not sustainable and, finally, it has highlighted that our euro area governance ought to be vastly improved.
“So what is happening now is the direct outcome of the policy decisions that have been implemented in order to respond to these disequilibria that were unsustainable.
“I agree that it is a very hard price to pay, but it is unavoidable.
“And, I have always said that the only way to mitigate the impact of this budgetary consolidation, which is contractionary in the short term, is to undertake structural reforms that could increase competitiveness and exports, as well as create jobs and growth.”
(*I’m off writing a book called The Default Line, a journey through geo-economics with British and European lens, to be published next year. The crisis made into a drama. So I’ll be blogging a little less over the next few weeks.)
Follow Faisal Islam on Twitter: @FaisalIslam