Why financial markets’ thinking about the euro zone is wrong

The unemployment rate in the euro zone has fallen to a very low level relative to the past. This normally increase s core inflation, unless the structural unemployment rate has fallen even further - which is apparently how financial markets are reasoning, as they expect inflation to subside rapidly. But this thinking cannot be right : t here has also been a sharp rise in relative commodity prices and a marked decline in productivity gains , both of which lead to a higher structural unemployment rate (by reducing the supply of goods and services). It is the refore extremely unlikely that the structural unemployment rate will have decreased. M ore likely , it has risen and the unemployment rate is now well below the structural unemployment rate. Unemployment in the euro zone would have to be significantly increased through a markedly restrictive economic policy in order to drive down core inflation.