Euro-zone crisis: from internal devaluations to a job-friendly alternative? Raymond Torres, Director, International Institute for Labour Studies, ILO

Euro-zone versus US   2009 2012 Unemployment Euro-Zone 9.6 10.9 US 9.3 8.2 Inflation 0.3 2.0 -0.3 2.1 Public Deficit -6.4 -3.2 -13.0 -8.1 Investment % of GDP 19.0 19.5 14.7 16.3

Starting position Overall similar or better than the US Somewhat larger intra-zone imbalances than in US But more limited institutional capacity to address those imbalances

Reaction to this situation: “internal devaluation” Fiscal austerity in deficit countries Attempts to regain competitiveness through “labour market reforms” in deficit countries Employment regulations relaxed Wage formation decentralised Significant cuts in minimum wages in some cases Conditional support to address debt issues

Effects of these policies Recession and higher unemployment in deficit countries, social unrest Further banking problems and little reduction in deficit, requiring more austerity Contagion to other countries, pushing them to move to austerity, and global risks

What went wrong? Internal devaluation does not work if: Productive base too narrow to react to new incentives Credit system does not function well, especially for small enterprises More and more countries move to austerity within the zone Some of the labour market reforms not well designed Links between central bank and sovereigns were cut Central bank no longer lender of last resort for governments Unclear whether central bank is lender of last resort for banks

An approach based on growth and jobs Repairing credit system, adopting credible medium-term fiscal plans Wages growing in line with productivity in surplus countries Boosting investment and jobs now EIB, structural funds, EU growth initiatives Activation policies: youth activation guarantees Social dialogue would boost consensus and confidence

Strong, well-designed labour market institutions Public employment services Collective bargaining helps! The lower wage increases, the more the pressures on public budgets to stimulate the economy Examples of well-designed employment protection systems (Austria, Netherlands) Training will be crucial

Alternative approach will improve job prospects

…and also deficits in medium term

How to make an alternative possible? Evidence-based analysis that prove that an alternative works -- formulation of an alternative with country differentiation Strengthen the constituency for the real economy: key role of social dialogue in countries and at EU level -- creation of an observatory? -- position papers that highlight risks of present course and benefits of alternative? International policy coordination: analysis and voice of ILO in Europe, G20, etc. in cooperation with EC (DG Employment )

Thank you for your attention! Further reading: World of Work Report 2012, avauilable at: www.ilo.org/inst torresr@ilo.org