High unemployment putting the ECB in isolation

February 6, 2014


Unemployment in the euro zone is stuck at 12 percent, an already high rate that masks eye-popping rates in many of its struggling member economies.

But in a press conference lasting one hour, European Central Bank President Mario Draghi mentioned the problem of high unemployment only a few times – satisfied with the central bank’s usual stance of imploring euro zone governments to implement structural reforms to their labour markets, on a case by case basis.

Draghi said:

 … although unemployment in the euro area is stabilising, it remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on the pace of the economic recovery.   

Governments must … continue with product and labour market reforms. These reforms will help to enhance the euro area’s growth potential and reduce the high unemployment rates in many countries. 

That was it: not a single new solution to the euro zone’s chronic unemployment problem, where in countries like Spain and Greece, well over one in four eligible workers are out of a job.

Any policy action was deferred until next month – at least until they have more news on already-very weak inflation.

Such a narrow focus makes the ECB look increasingly isolated.

The U.S. Federal Reserve and the Bank of England, its closest equals and allies in central banking, are both explicitly targeting unemployment in their pursuit of policy and not a single report on the jobs market has gone by without careful scrutiny by the financial markets.

Over the past few years, the Fed and the BoE have both had success in getting the unemployment rate down significantly from peaks struck during the depths of the Great Recession, although there is plenty left to do.

In Britain, the jobless rate has fallen to just above the BoE’s newly-adopted threshold of 7 percent more than two years before they thought it would.

Indeed, it has fallen so quickly that next week they are likely to scrap the policy that focuses on it – or at very least lower the threshold.

To the monetary policy watcher, that’s a spectacular failure in the BoE’s forecasting record.

To the formerly unemployed who has just found a job, it looks like good policy.

Indeed, a simple comparison of the three central banks and their unemployment rates would lead any person on the street to easily conclude which have been the most successful.


Key interest rate Jobless rate
U.S. Federal Reserve 0-0.25 percent 6.7%
Bank of England 0.50 percent 7.1%
European Central Bank 0.25 percent 12%


If you add the one thing that is missing, the picture becomes clearer.


Money printing (QE) Jobless rate
U.S. Federal Reserve ~3 trillion+ USD 6.7%
Bank of England 375 billion GBP 7.1%
European Central Bank Nil 12%



































What the U.S. and UK central banks don’t have is a treaty that prevents them from purchasing sovereign bonds. But the U.S. and UK governments are still applying fiscal austerity on a similar scale to many of the countries in the euro zone – or even greater.

In a note written before the ECB’s decision on Thursday to leave interest rates at record lows, economists at JPMorgan asked: “If the ECB does decide to act, would the response be meaningful?”

To many – most of all the unemployed – that depends on what it decides to do.


— with reporting by Yati Himatsingka and graphics by Vincent Flasseur


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I certainly don’t disagree that the ECB has a lot it could have done differently – and that Draghi is more than a little out of touch. That said, this article compares apples and oranges. Neither the US nor the UK has suffered a massive sovereign debt crisis, nor are they seeing the likes of 25% unemployment anywhere within them. Europe should focus on three things: debt management (ideally some debt forgiveness along with something like Eurobonds), fiscal stimulus (ideally focusing on modernizing infrastructure), and structural reform. The ECB cannot even come close to doing all of these things.

Posted by CommonNonsense1 | Report as abusive

Here’s the problem: no proof that loose monetary policy leads to more jobs in the long run, especially in a competitive world where work can often be shifted to other countries.

Posted by DavidMerkel | Report as abusive