If you want to understand the mentality of European Union officials regarding Europe’s depression, I think the best place to start is with the fact that they consider the experience of Ireland over the past several years to be a success story. And they really do. They’ll look you in the eye and say that this is a success story:
It’s ugly. Unemployment goes from a low of 4.6 percent in September 2007 all the way up to 15.1 percent by November of 2011. Since that time it’s fallen to “only” 13.5 percent as of April. Some success. But here’s what they’re talking about:
In Spain, unemployment was already 8.5 percent in September 2007 and in November 2011 it was at 23 percent. But that was no peak. As of April it’s risen all the way to a terrifying 26.8 percent. By comparison, Ireland really is a success story. And it’s a threefold success story. Part 1 is that during boom times Ireland had much less unemployment than Spain, a testament to its higher level of education and better labor market institutions. Part 2 is the fact that Irish unemployment has in fact fallen from the peak despite sharply contractionary fiscal policy and a monetary environment that’s arguably too tight even for Germany is a testament to the flexibility of the Irish economy. Part 3 is the fact that Ireland has basically been a “good soldier” during this process. Irish people obviously aren’t happy about austerity measures. They hate them! As would anyone. But they seem more or less resigned to the situation and are making the best of it. In Spain, by contrast, austerity has provoked many iterations of protest marches, strikes, and even riots. Those measures haven’t magically produced expansionary monetary policy from the European Central Bank or induced German taxpayers to cough up extra money. What they’ve done instead is further disrupt the economy. Unemployment just keeps going up and up.
So that’s the moral of the Irish success story—austerity sucks, but it’s not going anywhere and the best thing to do is to take it on the chin and keep your labor market institutions flexible.
But then there’s this:
Iceland has all kinds of problems. But its initial rise in unemployment was much smaller than Ireland, and the decline began much quicker. So on the list of Icelandic problems, mass unemployment doesn’t really appear. The country faced a huge negative shock to its citizens’ wealth and living standards, but people are working and by working they’re rebulding their wealth. That’s the Irish disaster. But to face up to it would involve facing up to the fact that the introduction of the single currency was, judged as an economic policy matter, a huge mistake. And that’s not something anyone in Brussels or Frankfurt are going to face up to anytime soon. It was always meant more as a political project than an economic one, and the economic costs simply turn out to have been much higher than anyone expected. But, again, nobody is going to say that. So Ireland is a success story. And compared to Spain (and Portugal, Greece, etc.) it really is. That’s the point.