Divergence of Unemployment Rates in Europe

May 29, 2015 | ,

The Maastricht Treaty mandates the European Central Bank to target inflation. In contrast, the Federal Reserve targets maximum employment, appropriate inflation, and moderate long-term interest rates. When comparing unemployment rates between the world’s two largest currency blocks, the United States has seen a much stronger recovery with lower levels of dispersion between states. The U.S. benefits from its ability to utilize fiscal stimulus, automatic stabilizers, and unconventional monetary policy.

On the other hand, the European Central Bank does not have the power or the authority to use automatic stabilizers on behalf of individual nations dealing with asymmetric shocks. It can only expand and contract its balance sheet by purchasing debt or issuing bonds as a third party. As this week’s chart shows, one of the direct consequences is that improving unemployment – among other economic challenges – is extremely difficult across a diverse set of countries. Thus, unlike the United States which has seen improvement in unemployment across all of its states, a notable divergence continues to exist across European nations and remains a challenge for future economic growth in select countries.