Thursday, January 19, 2017

Divergent Unemployment Rates Highlight The Intractable Structural Problems Of The Eurozone

The latest data from the nineteen member countries of the Eurozone show an average unemployment rate of 9.9 percent. That is good news, insofar as unemployment is down from its 2013 peak of 12.1 percent. The bad news is not only how high EZ unemployment still is, but how much the rate varies among member countries.

More than fifty years ago, Robert Mundell, then an economist at the IMF, wrote a classic paper explaining when currency areas can work well and when they cannot. Among other things, he noted that an ideal currency area should have free flows of labor among members, flexible labor markets within each member, and similar exposure of members to economic shocks.

If Mundell's criteria were satisfied, unemployment rates would not vary significantly from one member of a currency union to another. . .
Unfortunately, as the chart shows, the Eurozone falls far short of the ideal. . . .

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