Austerity New Normal Says ECB’s Mario Draghi

European Central Bank president Mario Draghi when he was governor of the Bank of Italy, February 28, 2011

European Central Bank president Mario Draghi when he was governor of the Bank of Italy, February 28, 2011

Europe’s social model is obsolete and fading according to central bank president Mario Draghi.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. That’s gone,” he said.

In an interview with The Wall Street Journal, the Italian head of the European Central Bank suggested 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 workers under the age of twenty-five is unemployed. The jobless rate in Italy and Portugal hovers around 30 percent.

Labor market reforms are essential if the highly indebted economies in the south of Europe are to recover. In Britain, Germany and other “core” countries, it is often easier for employers to dismiss and hire workers. In Germany and the Netherlands, trade unions have also been willing to freeze wages and accept temporary job contracts to weather the worst of the recession. Such flexibility is supposed to be extended throughout the single currency area as the euro nations have enacted a pact to boost their competitiveness.

Despite the recent emphasis on enhancing economic 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 predicted, and make it more expensive for countries as Italy and Spain to borrow.

Draghi acknowledged that public 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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