Structural policy reforms to tackle unemployment in the Eurozone


Sep. 5 2014, Updated 8:00 a.m. ET

Structural reforms in the Eurozone

The Eurozone’s unemployment is characterized by fairly complex interactions. Mario Draghi, the President of the European Central Bank (or ECB), discussed a need for aggregate demand policies and national structural policies. He expressed his views during his speech at the recent Economic Policy Symposium in Jackson Hole, Wyoming.

“No amount of fiscal or monetary accommodation, however, can compensate for the necessary structural reforms in the Euro area. As I said, structural unemployment was already estimated to be very high coming into the crisis (around 9%),” said Draghi.

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Monetary accommodation is the central banks’ attempt to stimulate economic growth by lowering short-term interest rates. This makes money less expensive to borrow. Monetary policy accommodation caused changes in interest rates. This has a direct bearing on bond market exchange-traded funds (or ETFs) like the Vanguard Total Bond Market ETF (BND) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). These ETFs invest in companies like Verizon Communications (VZ), Merrill Lynch (BAC), and General Electric (GE).

Supply side reforms

The ECB encouraged policies that will:

  1. Allow workers to quickly redeploy to new job opportunities. This will lower the unemployment time.
  2. Raise the workforce’s skill intensity by reducing the high youth unemployment. Ensure that employment is concentrated in high-value added, high-productivity sectors.

Measures to raise the workforce’s skill intensity include:

  • Combining cost competitiveness with specialization in high-value added activities. This is a business model that countries like Germany have successfully demonstrated. For example, Germany has improved the price competitiveness of its exports. It has also focused on specialization in the production of the investment goods that fast-growing economies demand.
  • Promoting education and lifelong learning to help reduce inefficient worker turnover.
  • Increasing incentives for employers and employees to invest in developing job-specific skills.

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