The European Employment Strategy and the EMU: You Must Invest to Save
Authors: Larsson Allan 
Published: March 2007

There are no secrets behind Europe's high and persistent unemployment. It is not a question of competitiveness Europe is doing well on global markets. We cannot blame our main trading partners, or low-wage countries, for our shortcomings. And we should not blame fiscal policies, the convergence process. The reasons behind unemployment are internal to Europe. There are two distinct explanations.

One has been our inability to tackle macroeconomic shocks in a coordinated way. As a consequence, downturns have been deeper and recoveries weaker than they need have been. The resultant low average rates of economic growth produced inadequate job creation relative to the growth of the potential workforce. The other explanation has been our inability to reform labour market policies and social protection systems to meet the labour market needs of today. Europe's policies were originally created for labour markets with one male breadwinner, working in manufacturing or construction. Labour market and social policies focused on ensuring income support to individuals and families through unemployment benefit, disability pension and early retirement schemes to off-set the effects of cyclical unemployment or ill-health.

Those labour market conditions have changed, and there are new challenges to be faced, notably the spread of new technology. Discord between the traditional policy mix and the reality of modern economic and social life has contributed to the low employment rate in Europe and the high dependency ratio. Reform is required. A good safety net during periods of unemployment must be maintained, but the urgent need is to create a springboard to new skills and new jobs.

There are now two distinct political responses to these two shortcomings. The first is Economic and Monetary Union with the single currency. The second is an emerging Employment Union, based on the new Treaty, the Luxembourg Summit and the new employment strategy. Together they form a convergence programme for higher employment and lower unemployment.

The purpose of these Europe-wide policies is to create both macroeconomic stability and labour markets that are adaptable to change, offering flexibility for enterprises and security for workers. The employability of job seekers, and of the workforce as a whole, must be given the same attention as monetary targets. That is the reason for the Luxembourg agreement on quantified targets for the fight against unemployment, based on a preventive strategy with a strong commitment to employability measures.

In a few weeks and months we will be turning a page in the book of European history, when the third stage of EMU is established and the single currency becomes a reality. It has already given a new credibility to Member State economic policies, with lower inflation and lower real interest rates than we have had for more than 15 years, and better investment, growth and employment prospects. The strength of this system has been proved during the turnoil that has followed the monetary crises in the Asian economies.

At the same time we are entering into a new convergence project, the employment strategy, with the purpose of convergence towards lower unemployment and higher employment. Now it is time to focus on the capacity of the real European economy: on the growth and employment potential of Europe as an economic entity, and on the substantially under-used working age population in Europe. Given our low employment rate, the EU has an additional growth potential of 25-30 million people compared with our main trading partners, Japan and the USA to add to the steady increases in Europe's economic capacity through productivity improvements. This leads to two questions: will the Member States take the necessary employability measures, to release this potential, to invest in people to make it possible to reduce the dependency on social protection? And, will the monetary system, i.e. the money markets and the Central bank, recognize that an active labour market policy gives room for stronger, employment-creating, growth in Europe without the risk of a resurgence of inflation?

In this perspective, we need to rethink and develop our analytical tools for understanding and defining labour market performance and flexibility. The NAIRU-concept and the OECD Labour Standard Index reflect the thinking of the past (regulation versus deregulation), rather than the present and the future (both flexibility and security). The EU Commission has started an analysis designed to develop new concepts and new analytical tools, reflecting the new employment strategy. We need to assess the real determinants and measures of 'success' in terms of long-run investment, growth and employment factors like the extent to which we fully use our available labour resources; the scale of our human resource investment; the degree of working time flexibility; the quality of our industrial relations; the mastery of new technology.

It is my hope that this 1998 Meidner Lecture could serve as a starting point for a constructive debate on new analytical tools for the shaping of more successful relations between employment and economic policies in Europe. Here, economists especially labour economists can make an important contribution to the process of policy modernization.