Jobs and Growth: Supporting the European Recovery
IMF Blog, January 28, 2014
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Bibliographic details
- Authors: Christine Lagarde
- Published: January 28, 2014
Overview of the current situation
- Growth is "finally picking up in the euro area" as it "is slowly emerging from the deep recession."
- "Still nearly 20 million people are unemployed."
- "Almost half of those without a job have been unemployed for more than a year."
- "Nearly one quarter of Europeans under the age of 25 who are looking for a job cannot find one."
- Country-specific youth unemployment:
- "In Italy and Portugal, more than one third of under-25s are unemployed."
- "In Spain and Greece more than one half are."
Relationship between jobs and growth
- Jobs and growth form a "two-way street": high unemployment reduces consumption and business investment, which further depresses growth and hiring.
- Macroeconomic impact estimate:
- "An additional percentage point of growth in the world’s advanced economies would lower unemployment there by about half of a percentage point, pulling over 4 million people back into jobs."
- Near-term policy prescription:
- "In the near term, there is no doubt that it will take smart monetary and fiscal policy to protect the recovery."
Roadmap for recovery — three priorities
- Priority 1 — Enhance the institutional framework of the monetary union:
- "Putting in place all of the elements of a banking union would be an excellent place to start."
- Key objectives:
- Ensure continued stability of the financial sector.
- Address spillover effects from potential instability.
- Provide "the capacity to undertake a timely, effective, and least cost resolution of ailing banks with a common backstop."
- Break the adverse bank–sovereign feedback loop whereby government support for weak banks calls into question public debt sustainability and investor confidence.
- Reduce investor uncertainty.
- Priority 2 — Reduce high debt levels across households, corporates, and the public sector:
- Rationale:
- "A lasting pick-up in growth will remain out of reach until the balance sheet legacies of the crisis are addressed."
- Given "the slow pace of global demand growth," sectors "face increased pressure to deleverage, to actively reduce their debt through higher savings, which threatens the recovery."
- Sequencing and emphasis:
- "IMF analysis indicates that high levels of private sector debt may be particularly problematic and should therefore be addressed first."
- "Private sector deleveraging today can support self-sustained growth later on."
- Policy actions:
- Put in place or reinforce appropriate microstructures, for example "effective insolvency frameworks—featuring, for example, fast and flexible personal and corporate bankruptcy proceedings—to help avoid lengthy periods of deleveraging and to protect growth."
- For government debt: "move gradually as long as markets allow, with policies anchored by a durable commitment to sustain fiscal consolidation at a steady but reasonable pace over the medium-term."
- Use consolidation as an opportunity to make budgets more growth friendly, "for example, by shifting from direct to indirect taxation."
- Priority 3 — Product and labor market reforms to realize full growth potential:
- Goals:
- Increase nimbleness and competitiveness to capture opportunities from cross-border production processes.
- Structural reforms have greatest impact when "undertaken in a way that is comprehensive instead of piecemeal."
- Country examples and targeted reforms:
- Czech Republic and the Republic of Slovakia: "established themselves as important intermediate producers for the German automobile industry" illustrating how integrating into supply chains can "enhance domestic value added and growth."
- Germany: "reducing structural rigidities in the German services sector—including via a review and harmonization of entry requirements in professional services—can help boost productivity there and spur domestic demand."
- Spain: "recent labor market reforms show signs of success."
- Acknowledgement: "reform priorities and design will vary widely across countries."
Key analytical conclusions and policy implications
- Reviving growth is the most effective route to creating jobs; boosting growth by 1 percentage point in advanced economies has a measurable and sizable effect on unemployment ("lower unemployment... by about half of a percentage point" and "pulling over 4 million people back into jobs").
- A multi-pronged strategy is required: stabilize the financial sector via banking union elements and resolution capacity; address private and public debt with sequencing that prioritizes private deleveraging and medium-term, growth-friendly fiscal consolidation; and implement comprehensive structural reforms in product and labor markets tailored to country circumstances.
- Policy design should aim to minimize uncertainty for investors, protect growth while deleveraging proceeds, and exploit structural integration opportunities to raise productivity and domestic value added.
Source: Jobs and Growth: Supporting the European Recovery — Christine Lagarde, January 28, 2014
