Andreas Dombret: The European labour market during the crisis
Welcoming address by Dr Andreas Dombret, Member of the Executive Board of the
Deutsche Bundesbank, at the reception given by the Deutsche Bundesbank at the Annual
Congress of the Verein für Socialpolitik, Göttingen, 12 September 2012.
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1. Welcome
Ladies and gentlemen, members of the association,
On behalf of the Deutsche Bundesbank, I would like to warmly welcome you to this
reception.
The Bundesbank is a true friend and supporter of the Verein für Socialpolitik - and not
without a certain degree of self-interest. Scholarship and research form an indispensible
foundation for the work of central banks - this holds true now more than ever. Conversely,
central banking issues time and again provide impetus to new research. Thus, the
relationship between central banking and scholarship can be suitably described as symbiotic.
But central banks are not the only parties with a strong interest in the Verein für
Socialpolitik's research findings that are presented and discussed here and elsewhere. In the
course of the crisis, the need to present and categorise information in a scientific and
well-founded manner, yet at the same time in a way that is understandable for the general
public, has increased enormously.
Providing explanations and, even more, overcoming the crisis undeniably raise fundamental
questions in many areas of our field. You are probably familiar with the old joke that
economics is the only field in which two researchers can receive the Nobel Prize for saying
the exact opposite thing. So it is not surprising that various approaches to solving the crisis
are the subject of contentious debate, indeed not just at symposia and research seminars,
but also among the general public. Such debates are also raging among economists, most
recently with regard to the need for a banking union.
This has a positive spin-off effect as this type of friction can unleash the energy needed for
promoting new insights. The Annual Congress provides the ideal forum for such productive
contention. Such congresses facilitate the direct exchange and debate of ideas, both as a
public event and in private.
2. Labour market reforms as an important part of adjustment processes
The subject of this year's congress - the labour market - is important and has practical
significance for central banks. This is relevant, of course, for the role that the labour market
plays in the monetary transmission mechanism as well as its impact on prices.
Well-functioning labour markets can make it that much easier to conduct a stability-oriented
monetary policy.
Additionally, the topic of this congress, "New Approaches and Challenges for Labour Markets
of the 21st Century" is highly topical with regard to the euro area crisis, which is overarching
everything else right now.
The crisis can also be seen as a balance of payments crisis of the affected countries,
brought about by excessive public and private debt, combined with a lack of competitiveness.
As we know now, the existing regulatory framework for monetary union, the "rules" of the
European economic and monetary union, did not prevent these undesirable
developments - the fiscal framework was not implemented consistently, and was watered
down, and the macroeconomic imbalances in individual member states, which are reflected
in the high level of private sector debt, were not treated with due attention or were completely
ignored.
And even if there is some disagreement within the profession about the correct pace and
timing: I have the impression that there is still a broad consensus that the crisis can only be
resolved if these causes are eliminated and avoided in the future.
Fiscal rules have been tightened at the European level; a new process to monitor economic
imbalances has been created along with mechanisms for crisis prevention. Major changes in
European banking supervision are also imminent; the European Commission will submit
proposals in this regard tomorrow.
Individual member states in particular are also called upon to take action. They must rein in
their public finances and create the necessary conditions in which their economies can
become more competitive again and enjoy sustained growth.
The structure of national labour markets and their possible reform play a crucial role here.
Such measures will not only make an important contribution towards increasing growth
potential, but also represent the most direct way of reducing the, in some instances,
dramatically high unemployment. This is borne out by events in Germany. Whilst one in four
of the labour force is seeking work in Spain and Greece, German unemployment was
5.5% in July according to the Eurostat's estimate. The labour market economists amongst
you know how arduous it can be to trace the path of how certain institutional changes
influence the situation on the labour market. However, several studies, including those by
some Bundesbank researchers, indicate that the labour market reforms of recent years
played a crucial role in contributing to the turnaround on the labour market and to its
resilience during the crisis.1
However, the German example also shows that labour market reforms need time to take
their full effect. The measures introduced in particular in Spain, Italy and Greece will not lead
to full employment overnight, especially as the devil is often in the detail. It is therefore not
certain whether the changes adopted so far are enough to increase the flexibility and
performance of the labour markets there sufficiently.
However, the reforms must lead in the medium term to "light at the end of the tunnel" on the
labour market. Pessimists who deny the possibility of a turnaround in the crisis countries are
currently having a field-day. However, if we remember the state of the German labour market
as recently as the middle of the last decade, few would have dared to hope for the
development emerging in subsequent years. The external environment was naturally
favourable at that time and the starting point was not as serious as that currently faced by
other countries. I believe that the crucial lesson is that with appropriate measures the
functioning of the labour market can be changed so that this per se, in a very broad
economic framework, allows more opportunities and thus also a more favourable
employment trend.
3. Germany's contribution to reducing imbalances
The aim must be for Europe as a whole to emerge stronger from the crisis. But in the
discussion on macroeconomic imbalances, there are often calls to force the core countries to
actively reduce their current account surpluses - through interventions in the wage discovery
process, for instance, or by way of additional fiscal stimuli - so as to bring relief for the deficit
countries. I won't beat around the bush here: besides the fact that narrowing the problem
down to an analysis of current account balances is, in itself, unfortunate, to say the least, this
path would do a disservice to Europe. After all, the euro area is not an island but a region
competing with the USA, Japan or China.
What is more, fixing one's sights on a greater contribution by Germany overlooks the reality
of the situation. Firstly, Germany's trade surplus with the euro area is less than 2%,2 and
secondly, boosting demand in Germany would trigger only negligible spillover effects in the
periphery countries. This is also confirmed by IMF research. On top of this, without the
rescue packages to which Germany has made a decisive contribution, the adjustment
process would inevitably be even more arduous and abrupt.
The crucial factor is that this adjustment process is already underway: unit labour costs in the
deficit countries are on the decline, considerably so in some cases, and Germany's current
account surplus with the rest of the euro area at the end of 2011 was only just around
one-half of the just over EUR 100 billion back in the year 2007.
Structural reforms, including labour market measures, are a major underpin of this process.
As the reforms usually affect large sections of the population, they initially often come at a
high political and social cost. However, the answer to this problem cannot be to drip-feed the
adjustments over time; on the contrary - making a quick, clean break is better for swiftly
reaping rewards and opening up prospects for the future.
4. Conclusion
Efficient labour markets are a key factor in overcoming the crisis. Decisive action must
therefore be taken to tackle the prevailing deficits so as to enhance the growth potential of
Europe as a whole.
By contrast, calls from various quarters for an artificially induced deterioration of
competitiveness in the surplus countries, macroeconomic fine-tuning or a simple
redistribution of burdens would be of no help to Europe; in fact, quite the opposite.
Policymakers are thus called upon to do their bit at European level and in the member states.
And monetary policy is called upon - not to alleviate the failures of policymakers in resolving
problems, but to continually reiterate that ensuring price stability is the primary and most
important contribution of monetary policy to the stability of the monetary union. It must
continually reiterate that this contribution can only be made by central banks that are
institutionally and de facto independent and have a clearly defined mandate.
With this brief and - some will certainly think - obligatory warning against the
misappropriation of central banks, I shall leave the matter there - as a Bundesbank official, I
hope you will forgive me for this "ceterum censeo", or mantra.
Thank you very much for your attention. I now wish you a pleasant and stimulating evening
at the Deutsche Bundesbank's reception.