Published on 8 Dec 2012

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

3 reader comments

  1. Philip Edwards says:


    “I agree that it is a very hard price to pay, but it is unavoidable.”

    Utter garbage. There are plenty of viable options. Nationalising the banks is one of them – and getting rid of the economic hoodlums too. They had their chance, thirty-odd uninterrupted years of rotten-to-the-core thievery with virtually no opposition. What you see all around you is the result of a system that does not even acknowledge morality or fairness except as a “hazard.” Which says it all really. Needless to say the only “hazard” is to the ability of these tenth rate spivs to fill their own pockets.

    All Draghi is doing is taking advantage of the depression caused by bankers looting in the first place. As usual, his kind of mentality is completely incapable of social conscience, let alone fairness. Hence the deliberate attacks on our most vulnerable citizens. There was a similar kind of maneuvering after WW2 except those who had sacrificed so much weren’t willing to tolerate the kind of miseries inflicted by organised cheap hoods like Draghi.

    Good luck with the book. If you can’t draw common sense conclusions from current events (and their ACTUAL roots) then I fear you will…

  2. Mike Bell says:

    It would be good if you explored the ‘local currency’ question.

    The argument is: Liverpool has unemployment because it has the £ and cannot devalue. If it had its own currency, this would fall in value as so Liverpool would price itself back to work.

    In the absence of local currencies, the centre ALWAYS has to bail out the periphery. In the UK this involves hand-outs to the regions. The same happens in the US with huge transfers when times get hard.

    The Euro-zone is pretending these consequences do not exist and that Greece can ‘austere’ itself back into business.

    If Greece could devalue – Greeks would experience high costs foreign holidays and imports, but their local buying power and wages would remain the same. Without a local currency Greece has to reduce the cash value of all its outgoings and the cash labour rate. This is traumatic.

    Without greater economic union in the Euro-Zone, the Zone will always be in crisis.

    This means that the position of non-Euro EU states like the UK is quite different. We do not need greater monetary union. the EU needs to recognise this and create a multi-tier system (or extent the existing one), so that the UK…

  3. Philip Edwards says:


    When writing your book I hope you consult this:

    It exposes the sheer rotteness and corruption that sucks out the economic life of this country. Whic, I assume, is of some serious interest?

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