A Diverging Eurozone
I am sick today and had to cancel plans with a friend tonight. I decided to look at Eurozone unemployment rates to pass the miserable time.
According to the Friday Eurostat press release,
The euro area1 (EA16) seasonally-adjusted unemployment rate was 10.1% in November 2010, unchanged compared with October4. It was 9.9% in November 2009. The EU271 unemployment rate was 9.6% in November 2010, unchanged compared with October4. It was 9.4% in November 2009.
The Eurozone started growing again in Q3 2009. But since then, the regional labor forces show a sharp divergence in resource utilization, as measured by the unemployment rates: the weak (Periphery) from the strong (core).
Here’s how it looked in 2007 before the Eurozone entered recession.
The 2007 unemployment rates were quite similar in levels, where the differences in unemployment rates across the Eurozone are defined primarily by structural, rather than cyclical, factors.
Here’s how it looks now, where the weakness in resource utilization due to cyclical factors is hitting the Periphery hard compared to the core countries, especially Germany.
The chart above illustrates the change in the unemployment rate over the last two years using the September-November 3-month average for comparison. The countries are ranked from largest to smallest percentage increase in the unemployment rate over the two periods.
All of the PIGS (Portugal, Ireland, Greece, and Spain) have seen their unemployment rates rise by 57% (Spain) or more (+82% for Ireland). To the right of the Euro Area average, you have Germany and Luxembourg seeing their unemployment rates decline over the same period.
The divergence in labor force deterioration across the Eurozone since 2007 is quite striking.
Rebecca Wilder
Rebecca has restated what is becoming an obvious flaw in the entire Euro system..the divergence in economic stability..and financial integrity..of the various parts that have been shoved into this artificial Union.
The real question for 2011 is whether countries like Germany and France have the fiscal staying power and the political consensus to continue acting as monetary sugar daddies to countries like Greece and Ireland..and at the end of the day Spain or Italy.
If I were a German..and certainly if I were Wolfgang Schaubel..I’d be planning to re-establish the DeutschMark pronto….
Yeah, well, Canada and especially Quebec is also leaving the USA in the dust. Oh the evils of socialism!
Thinking of oneself as a European with a shared heritage and shared values was an ideal on the march: an ideal that stands against entrenched parochialism and for greater humanity. After all, a currency called the “Euro” isn’t just a instrument of commerce it’s a mind set: “I’m a European, and part of my allegiance is directed there.”
In North America, even though people hypenate their their identity–Afro American, Asian American, Irish American, Italian American–wouldn’t it be more correct to put the American first because that’s the real way we’ve come to see ourselves?
In Europe, is the Union so weak that economic hardship can destroy it?
Let’s compare the Ueber-unemployment countries, Spain and the Baltics (Estonia, Latvia, Lithuania):
Were these countries fiscally reckless and economically stupid and did this cause the present problems? No, they were not fiscally reckless. Yes, they were economically stupid as they pursued neo-liberal austerity policies which emphasize foreign capital, which see labor as a disposable factor of production, are clueless as it comes to technical change, growth and increasing prosperity and sanctify rentier incomes and rate of return of foregin capital instead of labor income, domestic profits and mixed income.
A. Fiscal prudence. All of these countries had SURPLUSES before 2008
B. Foreign capital. All of these countries experienced booms which were fuelled by massive amounts of foreign capital
C. Withdrawal of foreign capital. When the Great Financial Crisis struck, foreign capital remigrated, causing a very serious and very sudden bust.
D. Neo-liberal job- and wage slashing. Jobs and wages were slashed, sometimes with as much as 20%. Wage and mixed income deteriorated with sometimes as much as 40%. This led to an unprecedented decrease of spending, a ‘Keynesian’ detorioration of the economy, contrary to IMF expectations to massive out migration, increasing hardship and an evaporating of the market economy.
E. No devaluation, as this would be bad for lenders. The Baltics could have devaluated, but choose not to. Why? The main reason, according to IMF spokesmen: bad for debtors.
The result: the Baltics experienced the most serious Post-war slump of any European economy, Spain is at the onset of its double dip (while unemployment is already 20%!). Like the thirties, it started as a financial crisis, like the thirties in the USA, it went on as a spending crisis, like the thirties, it requires massive growth (40%?) to reach pre-crisis levels of employment again. We need growth, not austerity.
Was this different in other countries? Yes. Poland and Sweden, both neighbouring countries without Euro or Euro-peg, are the only two European economies which are doing well at the moment. Both had, at the height of the crisis, a depreciating currency. Both know, at the moment, serious economic growth – without slashing of jobs or wages!
Was jobs and wage slashing necessary? Not to restore the competitive position of these countries, as the Baltics but Spain in fact also already knew wage levels which were enitrely competitive with those in Germany, Swizerland, Sweden, the Netherlands Austria etcetera. When you slash 4 Euro per hour wage costs in the Baltics with 10%, the real life economic difference with the 28 Euro per hour wages costs in Germany does not change in any meanigfull way (technology and education is basically the same in these countries).
External devaluation and defaulting on debt would have been the way ahead. Please, can anybody tell me why, when an economy declines, it is prudent to slash labor income while it’s seems to be a mortal sin to slash property income? When production is produced by labor as well as capital, should capital income not take a hit too? And should property income not take the hardest hit of all?
Who printed all the Euros to send fiat money in exchange for all those bubblous notes from the PIGS?
If the German went back to the DM what would happen to all the notes they hold from the PIGS denominated in Euros?
They are learning it is not much easier to dominate Europe with Euros than it tried with panzers.
And suppose the PIGS told the Germans “no bail-outs the bankers can go to blazes”?
No one is bombing Berlin in reprisal for weak control of where their bankers put the excessive fiat money.
Rebecca, this is one of the most interesting posts that I have seen in some time. Quite a story there.
Merijn –
Please, can anybody tell me why, when an economy declines, it is prudent to slash labor income while it’s seems to be a mortal sin to slash property income?
It’s simple. Remember the golden rule; “Who has the gold can make the rules.”
JzB
Merijn,
I want to commend you for pointing out that it was not for lack of neoliberal policies that the periphery of Europe are experiencing so much economic pain. But I also want to avoid drawing the conclusion that it was neoliberal policies that were to blame.
It’s a general economic pattern in large currency unions (such as the US and the Eurozone) that monetary policy has a tremendous capacity to wreak asymmetric effects. Boom areas tend to suffer the most when money switches from being loose to being too tight. The US is no exception.
I also want to take this opportunity to dispel the myth that asset price bubbles are the primary culprit in the busts that these areas experienced. In this case business friendly Nevada makes a convenient example.
The data for Las Vegas (Shiller) and Nevada (unemployment):
Month Shiller Unemployment
2006/7 233.07 4.4%
2008/7 154.37 6.7%
2010/7 100.92 14.4%
Sixty percent of the decline in housing prices had occurred before the great implosion in US nominal GDP, but only 23% of the runup in (mass) unemployment.
The real problem is not fiscal or regulatory policies. And the real problem is not asset price bubbles. The “real” problem is a “nominal” problem simply known as excessively tight monetary policy. The ECB needs to loosen up to accomodate the periphery. If it refuses to accomodate the periphery then the Eurozone has no business even existing. (And perhaps even Nevada should consider printing its own currency.)
I guess people are getting more lazy in europe because the unemployed almost get the same allowance from the goverment compared to those who are working and paying for high taxes. Why work hard when you would get almost the same amount from not working right?