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Symposium 2013

Solution for Holistic Approaches to Solve the Euro Crisis

The Challenge

Fourteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substan ...

Fourteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substantial consolidation of the budgets of numerous governments, and distressed banks are symptoms of economic misalignments and economic policy failure that threaten not only economic prosperity in Europe, but the European project as a whole. A series of interrelated fiscal and financial crises in the euro area have provoked a series of extraordinary policy measures. Some of these measures have undermined the fiscal sovereignty of affected countries, and they have circumvented market mechanisms. As social cohesion is called into question in various debtor countries, there is a danger that policy makers cannot or will not solve the existing problems in a way consistent with both monetary stability and the current political integration. The ECB’s announcement to possibly step in via its OMT-program has somewhat calmed down financial markets since mid-2012, but most of the fundamental questions for the future of Europe are either unanswered or answered quite differently by various parties. Policy makers have bought time, but the question remains what this time is used for and where the current policy stance leads to.

Implement comprehensive structural labor and product market reforms to achieve high and sustainable employment and productivity growth

Raising the capacity to generate employment and productivity growth requires structural reform. Country-specific reform needs to range from reducing barriers to market entry over competition-enhancing reform in the services sector to reform in employment protection and activation schemes. For example, competition-friendly reform is needed for reductions in unit labor costs to translate into adjustment of product prices and gains in external competitiveness. Active labor market and training programs need to be redesigned to cushion the impact of job losses in the short term and to facilitate the return to work before unemployment becomes entrenched. Product market reforms aimed at improving competition in the service and non-tradable goods sectors would support investment and domestic demand in external surplus countries.

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