Getting beyond Europe’s spend more / spend less debate

The debate over paths to economic recovery in Europe is often presented as a choice between austerity and stimulus. Less often heard in this debate is the range of options related to labour market reform. There are many ways that European states could reform their labour markets in an effort to promote sustainable growth, with various likely consequences for job security, income levels and other social values. Germany’s experience with labour market reform since 2005 is cited by some as an example of what the rest of Europe needs to do, and by others as an indicator of what not to do. This report presents some of the pros & cons of Germany’s experience through the lens of single industrial town near Munich.

As it shows, labour market liberalisation reduces unemployment. At a time when joblessness makes so many peoples’ lives miserable and boosts support for political extremism, and given the absence of  plausible alternatives to stimulate employment growth without making debt burdens even more unsustainable, it seems to me that many European states need to move in this direction. But as the report also shows, labour market liberalisation is not cost-free in social terms, so it must not be implemented without off-setting measures.

The real challenge facing Europe, then, is not captured by the spend more/spend less debate. The real issue is how to reform fiscal policy (both taxation regimes and spending programmes) to compensate for the downsides of liberalised labour markets. In this context, training schemes such as that which the Irish EU presidency seems set to advance, could be meaningful. But in the absence of greater flexibility, at least in those states with highly rigid labour markets, they would be spending money to prepare people for jobs that don’t exist.