By James K. Galbraith
Fifteen years ago there would have been an immediate confident mainstream answer. The United States was then celebrated for its flexible labor markets, while Europe was said to suffer from rigidity, known as Eurosclerosis. In a 1999 paper that has been cited over 2,000 times, economists Olivier Blanchard and Justin Wolfers argued that these differences of “institutions” conditioned the responses of the two regions to “external shocks.” Thus the US, with more flexible institutions, would rebound from an event like the Great Financial Crisis, while Europe would be expected to linger in stagnation.
Twelve years after Germany’s Hartz reforms (a set of reforms designed to make Germany’s labor market more flexible – the ed.), this explanation cannot hold. There is today a large low-wage sector in Germany. Inequality, which was once very low, has risen. There is enormous pressure on unemployed workers to take whatever jobs may be offered. Labor markets are therefore far more flexible than they were. No one can argue – though I suppose some may try – that the recent enactment of a loophole-ridden minimum wage has restored the power of German labor. And yet, it is Germany that is dragging the Eurozone down.
Europe’s economy today makes nonsense of claims that “structural reform” is the key to growth. Structural reform has been tried throughout Europe; it has produced growth nowhere. Granted, the enactments often fall short of the promises; but then each shortfall and each failure to show results sparks a call for more reforms – the true mark of a fanatic. The governments that continue to comply do so cynically: in Greece to escape (unsuccessfully, so far) from the bailout; in Italy to strengthen Mr. Renzi’s EU negotiating stance. Very few in the countries stricken by structural reforms delude themselves into thinking they will work.Read more