Convergence, Crisis and Unemployment in Europe: The Need for Innovative Policies

In this paper we review the double crisis that affected the euro area in the recent period. The focal point is that the austerity measures that have been undertaken in the area, especially in the peripheral countries hurt by the sovereign debt crisis, not only have caused a deep recession but are likely to lead to a stagnation with persistent unemployment. In the first part of the paper, we examine the original weaknesses in the construction of the monetary union, especially the emphasis placed on nominal convergence criteria without taking into account the need for real convergence. This analysis is corroborated by some econometric investigations based on sigma and beta convergence for different macroeconomic variables, distinguishing between the pre-crisis period, 1999-2007, and the recent 2008-2013 period. The empirical section continues with a discussion of recent macroeconomic trends focusing on unemployment: it stresses that the deep and prolonged recession can be defeated only through adequate demand management policies. The next section explains how the excessive austerity policies recently carried out have also been caused by wrong assumptions about the size of the fiscal multipliers. The final policy section emphasizes three aspects: (i) the radical reforms, at the European level, necessary if the monetary union has to survive; (ii) the changes in macroeconomic policies required to put an end to the present stagnation; (iii) the different and innovative policies needed to fight the high level of unemployment (especially youth unemployment)