Austerity New Normal: ECB’s Mario Draghi

The time when Europe could afford “to pay everybody for not working” is gone.

Europe’s social model is obsolete and fading, according to central bank president Mario Draghi.

“You know there was a time when [economist] Rudi Dornbusch used to say that the Europeans are so rich they can afford to pay everybody for not working,” he said. “That’s gone.”

In an interview with The Wall Street Journal, the Italian head of the European Central Bank suggests that austerity is the new normal on the old continent. The social democratic welfare model of lifelong employment and generous safety nets is “already gone,” he said, citing high youth unemployment figures in the eurozone’s periphery.

In Greece and Spain, half of the workers under the age of 25 are unemployed. The jobless rate in Italy and Portugal hovers around 30 percent.

Reforms

Labor market reforms are essential if the highly indebted economies in the south of Europe are to recover. In Britain, Germany and other “core” nations, it is often easier for employers to dismiss and hire workers.

In Germany and the Netherlands, trade unions have also been more willing to freeze wages and accept temporary job contracts to weather the worst of the recession. Such flexibility is supposed to be copied elsewhere as eurozone countries have enacted a pact to boost competitiveness.

Fiscal consolidation

Despite the recent emphasis on enhancing growth, Draghi said Europe must remain committed to short-term fiscal consolidation.

“Backtracking on fiscal targets would elicit an immediate reaction by the market,” he warned, and make it more expensive for countries like Italy and Spain to borrow.

Draghi acknowledged that spending cuts can hurt the economy in the short term but argued that the negative effects are offset by structural reforms.

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