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Milton Ezrati of Lord AbbettThe European Central Bank relieved world financial markets not too long ago when it made clear its willingness to provide needed liquidity. Even in the face of new concerns about Spain, that commitment has helped calm markets. Less in the headlines, but perhaps even more welcome, are the fundamental economic reforms, particularly in labor markets, that have begun to emerge in the beleaguered nations on Europe’s periphery. These efforts ultimately promise a more durable response to Europe’s problems than any financial aid from the ECB or elsewhere.

For years, labor laws in Spain, Italy, Greece, France and elsewhere in Europe have come under criticism. The International Monetary Fund, analysts at the European Union itself, and German reform advocates have identified a bewildering complex of employment laws, regulations and practices that have imposed rigidities on labor markets in these economies; needlessly raised production costs; and increased their rates of unemployment, particularly among the young. According to the IMF, the situation has cut almost one percentage point a year off potential real growth rates in these countries, worsening their fiscal imbalances and blocking needed adjustments to the current debt crisis.

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