Tax laws, by discouraging two-income households, further block flexibility. Called the “tax wedge,” these burdens have sometimes climbed to over 40% of the additional income beyond normal income tax rates. Still more, high minimum wage laws have made it almost entirely uneconomic to employ low-skilled workers, leaving many unemployable and a burden on each nation's social welfare system. The IMF estimates that minimum wages in Greece, Spain, and Portugal are close to 50% of the medium national wage. In France, they verge on 65%.

Unwinding such market impediments will not be easy and certainly cannot happen overnight. Still, it is encouraging that several of these nations have used the pressure of the crisis to begin the process. In just the last few months, for instance, Italy amended its 1970 labor law to allow layoffs for economic reasons, not just misconduct. Recent reforms also capped severance packages, admittedly to a still high maximum of 15 months of salary, and created a much less generous universal unemployment insurance scheme. Spain has reduced required severance; moved away from nationwide, one-size-fits-all collective bargaining arrangements; and allowed more flexible hiring and firing rules, both to relieve youth unemployment and to increase productive efficiency. France has moved more slowly, no doubt because it feels less immediate pressure than Spain and Italy, but even its new Socialist government has proposed a relaxation of hiring and firing rules, provisions to allow decentralized collective bargaining, and means to give firms more flexibility in setting workers' hours.

The Italian experience speaks loudly to how the crisis has served these reform needs. For years, the country tried to amend its labor law and, until this year, it has always failed. Past efforts faced intense resistance from organized labor and huge protests. The last two major reform efforts, in 1999 and 2002, saw the Red Brigades assassinate the major reform leaders of the time. This year, there were no killings, the protests were modest, certainly by past standards, and some unions even declined to condemn the reform proposals.

These nations have a long way to go. There will be backsliding, no doubt. Just recently the Portuguese government had to cancel plans to make some workers contribute to their own pensions. But the efforts are more of a start than would have seemed possible just a year ago. The changes will also take a long time to have effect. But it is just such longer-term fundamental reform that will redress underlying differences within Europe and get to the tap root of today's problems. Such reform is also critical if the ECB's monetary help is to do more than just paper over difficulties. To that extent, such remarkable change is even more encouraging than the ECB's welcome, more immediate efforts.