Olli Rehn is not liked in Spain – neither are the ECB, IMF and European Commission

This is a very bitter-sounding writing by a distinguished Spanish professor. It’s main lesson is that the problems in the Eurozone are not in the labour market; with the exception of Greece perhaps, labour market rigidities have not caused unemployment. To quote:

In other words, it is assumed that unemployment is lower in the US because it is easier to fire workers in the US than in the EU (including Spain). If that was the case, then how can it be explained that US unemployment was higher than the average of countries that later on became the EU-15 for the majority of years in the post-World War II period, even as the US labor market was already more ‘flexible’ than those of the countries that would eventually form the EU-15? In fact, unemployment in the EU only started to overtake the US unemployment rate when preparations to establish the Euro were underway, as the governing institutions of the Euro set controlling inflation as a top priority rather than job creation.

The main lesson, in particular for Olli Rehn, should be: making labour markets more ‘flexible’ (euphemism for making hiring and firing easier) is not the solution for getting the economy up to speed. In a situation of depressed demand (domestic, European and global), is it smart to make it easier to fire workers, so that they have less income to spend? Of course not. Furthermore, in the context of the euro, increasing unemployment means greater reliance on social safety nets, which shows up in increasing government debt, which currently triggers uncontrollable craving by politicians to cut the government debt.

You know, there is a reason why social safety nets are called ‘automatic stabilizers’ – they make recessions less severe and redistribute wealth when there is a boom. The current generation aims to destroy all that and go back to pre-1930s economic ‘wisdom’.

In the context of the Eurocrisis it is very hard to understand the stance of ‘Northern’ Social-Democrats, i.e. in Finland, Netherlands and Germany in particular. But it is no surprise that many people also in those countries are flocking towards populist parties on the left and right.  Let there be a lesson for those parties before it is too late.

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