Low growth and high unemployment in Europe - Causes and policy options

Klaus-Werner Schatz, Joachim Scheide and Peter Trapp

No 140, Kiel Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The stock market crash of October 1987 was not followed by the widely-feared recession in the world economy. Most forecasts have been revised upward again, and many are even more favorable than before the crash. This is also the case for Western European countries. However, beyond the very short run, there are serious cyclical risks. In the 1980s, the economic performance of Western European countries in terms of real GNP growth has been weaker than in previous decades, and unemployment is now more than twice as high as it was ten years ago. These developments are due to the poor performance of business investment. Rising labor costs have prevented employment and, hence, potential output from growing faster. This sharply contrasts with conditions in the United States and Japan. If the growth of potential output is to be increased, the rentability of investment and the flexibility in the labor market must be strengthened. As case studies for West Germany show, regulations, high minimum wages, wage costs and unemployment benefits have contributed to the longterm rise in unemployment. Therefore, demand stimulation will not induce faster growth and more employment. In the past 25 years, the acceptance of more inflation has not led to a lasting reduction of unemployment. Only a more market-oriented strategy can go to the root of the problem. An important prerequisite for a stable economic development is that monetary policy in industrial countries returns to a path compatible with price level stability. Monetary aggregates are still the most reliable anchor; alternative strategies for monetary policy — targeting interest rates, exchange rates or commodity prices — may well increase instability in industrial countries. Also, international coordination of macroeconomic policies is not necessary and may even be harmful if policymakers rely on wrong models. Given the failures of several attempts to coordinate (the locomotive strategy or the Louvre accord), industrial countries would fare better if they relied on sound policies at home rather than pointing toward mistakes of other countries.

Date: 1988
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/395/1/025202359.PDF (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkdp:140

Access Statistics for this paper

More papers in Kiel Discussion Papers from Kiel Institute for the World Economy (IfW Kiel) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().