Thursday, February 6
The presentation featured selected chapters from the forthcoming IMF book, focusing on some of the key questions facing policymakers, including:
Mr. Antonio Spilimbergo, Advisor, European Department, International Monetary Fund
Mr. Martin Schindler, Senior Economist, International Monetary Fund
Electronic versions of the book chapters are available at the IMF book launch website: http://www.imf.org/external/np/seminars/eng/2014/EURbook/index.htm
With unemployment in much of the euro area near post-war highs, time could not be riper for a new book sifting through its possible causes, the prospects for recovery, and how policies can help strengthen this recovery. On February 6th, 2014, the JVI hosted a presentation about the forthcoming IMF book on Jobs and Growth: Supporting the European Recovery as part of a launch across several European capitals. Two of the authors and editors, Messrs. Martin Schindler and Antonio Spilimbergo of the IMF’s European Department, presented key findings.
In motivating the book, Mr. Schindler quoted Spain’s Finance Minister Luis de Guindos who noted, upon his country’s first positive quarterly growth outcomes in 2013, that “Spain is technically out of the recession, but at unemployment of over 25%, it is not yet out of the crisis.” This quote illustrates the harsh reality faced by many European economies.
The reasons are multifold, but a few factors stand out. One is the high level of indebtedness in both public and private sectors across the euro area. Regarding the private sector, the authors showed that countries with greater “balance sheet distress” at the onset of the crisis recovered much more slowly than countries with healthier private balance sheets. What is also different this time compared to past recessions is the more limited scope available for supportive fiscal policies due to high public debt in many countries. As Mr. Schindler pointed out, there is a non-trivial catch-22: higher output and employment growth help deleveraging but faster growth does not come easily when leverage is high. Escaping this trap requires strategic sequencing: go slower on public sector deleveraging where country conditions allow, but faster on private sector deleveraging, while ensuring that full-fledged structural reforms are implemented. As structural reforms foster growth, deleveraging is made easier.
But partial structural reforms can sometimes have unintended consequences. Mr. Spilimbergo noted that in response to the “IT revolution” of the 1990s and globalization challenges, many countries implemented only partial reforms. The resulting “Mediterranean” labor market model has been particularly problematic, in its duality between high levels of employment protection for those on permanent contracts and the proliferation of temporary contracts without protection. This has led to the striking paradox that those who kept their jobs during the crisis worked longer hours while unemployment soared. The rise in youth unemployment is particularly worrisome as it can have a negative impact on lifetime careers and earnings paths.
Another “big” topic was the still limited participation by many Eurozone exporters in global supply-chains. While this participation is high for some countries and sectors, notably Germany as a “hub” and others, such as the Czech Republic or Slovakia as intermediate suppliers, it is very low for much of the euro area periphery. Since the euro area is essentially trade-friendly and countries are close to each other, prospects are rosier and the benefits of greater supply-chain integration seem obvious. Mr. Schindler noted that some of the same structural policies that help growth will also improve competitiveness and the ability to benefit from cross-border supply chains.
A few questions from the floor followed the presentation. Just to pick one – namely, on the relationship between growth and inequality – Mr. Spilimbergo noted that it depends on the labor market “model”: Inequality would likely increase in countries with a dual labor market, as those with protected jobs will benefit from rising wages which are less likely to materialize for the unemployed or the sub-employed.
Luis Catão, Senior Economist, JVI