Measured against the OECD’s top three performers, the euro area is lagging far behind in both product and labour market efficiency, with no euro area country in the top three and with the largest euro area countries often underperforming the euro area average[17]. 2  BIS central bankers’ speeches  In recent years we have seen a number of important reforms, particularly in those countries that carried out economic adjustment programmes. The main focus has been on reforms in the labour market. The nominal and real labour market rigidities that we have traditionally lived with in Europe have resulted in what is being called the “European unemployment disease”: persistently high unemployment rates and a limited ability to adjust to economic shocks. You get a very telling picture if you plot the unemployment rate in the euro area and in the US over several decades – say, from the 1970s. Every time there is a downturn in economic activity, the unemployment rate goes up in both regions. However, whereas the US quickly readjusts when the economy picks up, the euro area takes much longer to do so and once the unemployment rate actually starts falling it almost never seems to return to that previous low. The end result is that euro area unemployment has risen steadily for 40 years. [18] That said, there is solid theoretical and empirical evidence showing that greater flexibility results in much lower equilibrium unemployment rates[19].
In terms of downside risks, these include the risk that growth abroad disappoints and the risk of further disruptions to the supply of oil and higher oil prices. On the inflation front, the overall rate of increase of consumer prices, as measured by the 12-month change of the price index for personal consumption expenditures, slowed to 2.3 percent in February from a recent peak of 2.9 percent last September. Even though the recent rise of gasoline prices mentioned above could interrupt this pattern, we expect this moderation of overall inflation to resume later this year. While the underlying core inflation rate, that strips out volatile food and energy prices, has been somewhat higher than expected a few months back, it appears that the annual rate of core inflation1 has peaked and we expect it to begin to decline later this year.2 Finally, inflation expectations, which play an important role in the inflation process, remain well anchored. By this I mean that people expect that the rate of inflation will continue to be relatively low for some time to come. Regional Economic Conditions So how is the recovery proceeding in the state and the region? As I mentioned, the New York Fed produces indexes that help us track economic activity in the region. Based on these measures, the economic recovery that began in New York State in late 2009 has continued through early 2012, and even gained some momentum.