CRF Blog

Euro Illusions Force Weaker Nations Into High Unemployment

by Bill Hayes

In Euro Illusions Force Weaker Nations Into High Unemployment for Bloomberg Businessweek, Clive Crook looks at how the euro weakens Europe’s economies.

The basic contradiction was foreseen many years ago. In a single-currency system, policymakers lack the most powerful tool for helping individual economies adjust to setbacks: interest rates set according to national conditions. To succeed, a single-currency system needs either large fiscal transfers (so fiscal policy can do what monetary policy can’t) or highly integrated labor markets (so the unemployed can move to stronger markets to find work), and preferably both. The euro area has neither, and its governments, even after an epic sovereign debt crisis, have no plans to do much about it. This leaves the EU’s weakest economies with no choice but to restore their prospects through the brutality of “internal devaluation” — using high unemployment to force down labor costs.

The countries at the center of the crisis — Greece, Ireland, Portugal, and Spain — have all made heroic efforts to improve their competitiveness in the past four years, but they have more work to do. Meanwhile, their unemployment rates are 26 percent, 11 percent, 15 percent, and 26 percent, respectively. [more]