Over the past 25 years in Europe, unemployment rose as monetary policy was tightened and interest rates were raised to fight inflation. But after inflation succumbed, unemployment did not fall – or not by much. If unemployment was not stuck quite at Great Depression levels, it remained high enough to make long-term joblessness or the fear of long-term joblessness a defining experience.

Societies in which the official unemployment rate stands at 10% or more for generations are societies in which government economic management has failed. So, for 20 years it has seemed to me that Western Europe’s underlying political equilibrium – corporatist bargaining and ample social insurance, on the one hand, and tight monetary policies, on the other – must crack.

Twin fears appear to be paralyzing European policymakers. Europe’s central bankers fear that their political masters will order them to loosen monetary policy, that the structural reforms needed to free up aggregate supply will not be forthcoming, and that the result will be a return to the inflation of the 1970’s. In short, they fear that all of the sacrifices made for price stability will have been in vain.

West European politicians, for their part, fear the opposite outcome. They worry that even after undertaking structural reforms to reduce the attractiveness of unemployment benefits and increase the ability of workers to move to jobs and of firms to move to workers, central bankers will continue to insist on tight money. In short, they fear that, with no expansion of output or employment, the net effect will simply be an increase in poverty.

Of course, these fears are accompanied by the hope that structural reforms and monetary expansion work in harmony, boosting employment and output without raising inflation by much. But the reality is that steps toward looser monetary policies are non-existent – especially with the fledgling European Central Bank anxious to establish its inflation-fighting credibility – and that steps toward structural reforms are half-hearted, hesitant, and small.

For 20 years, I have been wrong: West European polities have remained stable despite the exclusion of a large proportion of citizens from meaningful participation in much of economic life. West European economies have continued to grow – albeit not as rapidly as they might have – despite bearing the heavy burden of the unemployed 10% or more of the labor force.

Now, though, it looks like I may finally be right – or at least right to worry, if not to panic. The French rejected the European Union constitution, primarily – or so it appears – because further European integration, it is feared, must bring in its wake the huge costs and disruptions of neo-liberalism.

It is one thing to back the “European project” when the idea is to bind Germany so tightly to France that never again will anybody think it worthwhile to wage a war over what language is spoken in Alsace-Lorraine. It is another when the European project means that French workers face competition from Polish plumbers, Romanian farmers, and Turkish shop clerks.

In Germany, the electorate seems poised to eject Chancellor Gerhard Schroeder out of discontent with his tepid allegiance to the neo-liberal project. The problem is that the electorate will then get four years of rule by a chancellor, Angela Merkel, whose commitment to the neo-liberal project is almost as strong as mine. I think that Germany would be better off in a decade under more neo-liberal policies. But this does not seem to be what the German electorate wants, and this makes the complexion of German politics four years from now incalculable.

Coupled with all this is northern European discontent with the central bankers, specifically with the ECB and the euro. It is not that the end of European Monetary Union is on the agenda; it is merely that people have begun thinking about possible low-probability futures in which the end of EMU might be placed on the agenda. That is enough to shake asset prices worldwide.

Western Europe’s accomplishments since World War II are among the most heartening and impressive success stories in world history. Everyone should want today’s undivided Europe to build on these accomplishments, rather than for generations of high unemployment to jeopardize them.

But this will require a shift in the ECB’s attitude. Europe needs a monetary policy that views aiding employment growth in northern Europe as more important than continental price stability.

There will, after all be inflation in southern and eastern Europe – there must be, for as regions develop and industrialize their terms of trade must improve, and under a monetary union regional inflation is how this can happen. The ECB should not try to balance inflation in the south and east with deflation in the north in order to hit artificial continent-wide targets.