The European Central Bankrelieved world financial markets not too long ago when it madeclear its willingness to provide needed liquidity. Even in the faceof new concerns about Spain, that commitment has helped calmmarkets. Less in the headlines, but perhaps even more welcome, arethe fundamental economic reforms, particularly in labor markets,that have begun to emerge in the beleaguered nations on Europe'speriphery. These efforts ultimately promise a more durable responseto Europe's problems than any financial aid from the ECB orelsewhere.

For years, labor laws in Spain, Italy, Greece, France andelsewhere in Europe have come under criticism. The InternationalMonetary Fund, analysts at the European Union itself, and Germanreform advocates have identified a bewildering complex ofemployment laws, regulations and practices that have imposedrigidities on labor markets in these economies; needlessly raisedproduction costs; and increased their rates of unemployment,particularly among the young. According to the IMF, the situationhas cut almost one percentage point a year off potential realgrowth rates in these countries, worsening their fiscal imbalancesand blocking needed adjustments to the current debt crisis.

It would take volumes to describe all these dysfunctional laborarrangements. Illustrative, however, are the restrictions thatFrance, Italy, and Spain have long imposed on hiring and,especially, firing. It has been incredibly difficult and costly inthese countries to let a full-time employee go. Often companieshave to make the case for layoffs in arbitration, even in extremeeconomic situations. Legally required severance can rise to severalyears' salary. Such strictures have discouraged hiring altogetheror impelled firms to hire only with limited, fixed-lengthcontracts. In such circumstances, the young have a hard timefinding rewarding work, while the economies lose the benefits oftheir talents and labor. What is more, older workers have clung totheir secure, protected positions rather than follow jobs tofaster-growing areas, in the process hamstringing firms' abilitiesto take advantage of new lines of business.