Wolfgang Munchau on the Long-Term Economic Prospects
of the EU: Jobs and Employment
The Director of EuroIntelligence and Associate Editor of
the Financial Times delivered the third iCES
'Teaching on Europe' lecture to staff and students on the
long-term perspectives on employment after the financial
crisis
Professor Scriven introduced the speaker on behalf of iCES
commenting on the importance of Munchau's work at EuroIntelligence as one of
the foremost online resources on European financial matters and the
timely nature of the lecture in addressing fundamental questions
about the future of employment during and after a period of crisis.
He also introduced students to Munchau's
online article in iCES Annual Review, Contemporary
Europe as a key study resource.
Five ways of addressing Employment in the EU
In his talk, delivered to an audience of over 45 staff
and students, Mr Munchau examined five perspectives on employment
before and after the crisis:
Factors
determining growth and jobs in the long run- Pre-crisis job and growth trends in the EU
- The effect of the financial crisis on the output trend
- The effect of the financial crisis on employment trends
- Issues of policy
How to think about growth
Munchau began by examining the way in which economists
think about growth, highlighting their tendency to dismiss
macro policies as irrelevant in long-run scenarios as they are
perceived to affect the cycle of growth rather than structural
changes. However, as he pointed out, reforms like financial
liberalisation may affect cycles of recovery and there is evidence
of very long cycles such as the case with the Japanese depression
cycle.
He reviewed five factors that determine long-term growth:
demography, technology, skills, efficient resource allocation and
the regulatory environment. In Europe, pre-crisis analysis of
growth would have concentrated on the sources of differences in GDP
per capita and on a comparison between the USA and EU labour
productivity gap. The gap would have been mostly on TFP and
labour utilisation of the number of hours worked.
Effects of the Financial Crisis
In this scenario, Munchau argued that there are three
possibilities to consider when looking at the impact of the
financial crisis on employment and growth recovery:
1- a recovery where sometime after the crisis there is growth
and eventually there is no loss in output
2- a level effect: a long term effect on output level but no output
growth where there is a permanent loss in outputs but growth
continues even though it is below the output level
3- a combined level and growth effect where there is a potential
loss of increase of wealth over time.
He then examined the alternative crisis scenarios for potential
GPD, its effects on the Euro Area: length of the financial crisis,
the limitation for export-led growth, hysteresis effect in workers
labour, risk aversion and permanent increase in risk premium.
Consequences for Employment
Munchau then examined unemployment rate projections, the impact
of employment protectio
n legislation and
its effects in different EU countries.
The effect of stimulus programmes on jobs was lower in the UK
and the EU in general and had less of an impact than in the United
States.
The combination of strategies in labour employment, type of
export and services, as well as strategies for coping with crisis
and protection legislation meant that Spain and Ireland had the
worst projected change, entering a stage of depression in
employment; with the UK being marginally worst off than
Germany, Italy and France -entering but moving out of
recession- and better off than the United States and Canada in
employment figures.
Conclusion: A Policy Action Plan
Wolfgang Munchau argued that the crisis will have a long term
effect on potential output levels. It might also have a long-term
effect on potential output growth, and a strong short and medium
term effect on employment. The total effect will be dependent on
the duration of the economic downturn and the credit squeeze in
particular and it will be highly dependent on policy.
Munchau concluded with a policy action plan where in
the 'short term we would need 'to resolve the banking crisis
as soon as possible' with 'no premature exit strategies' that would
artificially prolong the crisis; and 'medium to long-term policies
that would allow for better crisis management in the EU', and for
'economic reforms to raise productivity levels and growth' along
with 'Labour market reforms'.
Tuesday 15th of October 2009
Institute of Contemporary European Studies (iCES)
Page last updated 11/9/2009