Eurozone crisis from internal devaluations to a jobfriendly

Euro-zone crisis: from internal devaluations to a job-friendly alternative? Raymond Torres, Director, International Institute for Labour Studies, ILO

Euro-zone versus US Unemployment Euro-Zone US Inflation Euro-Zone US Public Deficit Euro-Zone US Investment % of GDP Euro-Zone US 2009 9. 6 9. 3 2012 10. 9 8. 2 0. 3 -6. 4 -13. 0 19. 0 14. 7 2. 0 2. 1 -3. 2 -8. 1 19. 5 16. 3 2

Starting position • Overall similar or better than the US • Somewhat larger intra-zone imbalances than in US • But more limited institutional capacity to address those imbalances 3

Reaction to this situation: “internal devaluation” • Fiscal austerity in deficit countries • Attempts to regain competitiveness through “labour market reforms” in deficit countries – Employment regulations relaxed – Wage formation decentralised – Significant cuts in minimum wages in some cases • Conditional support to address debt issues 4

Effects of these policies • Recession and higher unemployment in deficit countries, social unrest • Further banking problems and little reduction in deficit, requiring more austerity • Contagion to other countries, pushing them to move to austerity, and global risks 5

What went wrong? • Internal devaluation does not work if: – Productive base too narrow to react to new incentives – Credit system does not function well, especially for small enterprises – More and more countries move to austerity within the zone – Some of the labour market reforms not well designed • Links between central bank and sovereigns were cut – Central bank no longer lender of last resort for governments – Unclear whether central bank is lender of last resort for banks 6

An approach based on growth and jobs • Repairing credit system, adopting credible mediumterm fiscal plans • Wages growing in line with productivity in surplus countries • Boosting investment and jobs now – EIB, structural funds, EU growth initiatives – Activation policies: youth activation guarantees – Social dialogue would boost consensus and confidence 7

• Strong, well-designed labour market institutions – Public employment services – Collective bargaining helps! The lower wage increases, the more the pressures on public budgets to stimulate the economy – Examples of well-designed employment protection systems (Austria, Netherlands) – Training will be crucial 8

Alternative approach will improve job prospects Employment growth advanced economies (Source: GEL model) 0, 5 0, 0 -0, 5 -1, 0 2009 2012 Baseline scenario 2015 Poorly designed cuts 2018 2019 Job-centred approach 9

…and also deficits in medium term Government deficit advanced economies (Source: GEL model) 0, 0 -0, 5 -1, 0 -1, 5 -2, 0 2009 2012 Baseline scenario 2015 Poorly designed cuts 2018 2019 Job-centred approach 10

How to make an alternative possible? • Evidence-based analysis that prove that an alternative works -- formulation of an alternative with country differentiation • Strengthen the constituency for the real economy: key role of social dialogue in countries and at EU level -- creation of an observatory? -- position papers that highlight risks of present course and benefits of alternative? • International policy coordination: analysis and voice of ILO in Europe, G 20, etc. in cooperation with EC (DG Employment ) 11

Thank you for your attention! Further reading: World of Work Report 2012, avauilable at: www. ilo. org/inst torresr@ilo. org 12