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Economy in Brief

Worse Vs Much Worse...
by Robert Brusca July 6, 2009

The accompanying chart makes the point that US rate of unemployment has risen a lot and Europe’s has risen by a little. Still the higher US rate of unemployment will fall sharply in recovery whereas Europe’s history suggests that its rate will remain above the rate of unemployment in America even when it falls. Europe’s labor markets are more insulated and less flexible. That will be the next challenge for Europe.

In Europe a few statistics show us how disparate conditions can be even within the EMU portion of Europe. German unemployment is up by just 0.3% points over the last 12 months. French unemployment is up by 1.7 percentage points. Spain’s unemployment is up by 8.2 percentage points, accounting for the bulk of the rise of the rate of unemployment in EMU over the past year. Over the same period the US rate is up by 3.9 percentage points, and Japan’s rate is up by 1.2 percentage points. While there are regional disparities in most large countries, especially in the US and in Japan. But because of its single monetary structure and split fiscal structure, regional disparities of the sort EMU is bearing put a great deal more pressure on the system than would be the case in a true single independent nation.

For the US, a period like this offer the economy the opportunity to reinvent itself as old businesses are killed off and new opportunities and needs reveal themselves. Of course, in this cycle some old US industries were bailed out because the government thought they were still worthwhile. Europe has had same the same experience.

Both Europe and the US will be leaving this episode of recession with much higher levels of debt. This will be a challenge for the period ahead. The US has showed an ability to get strong growth and rebuild tax revenues in recoveries. Europe has not showed that same sort of dynamism. Certain European countries, EMU members (plus the UK) have the added burden of Maastricht criterion that quantitatively restricts their debt levels relative to GDP. As recovery sets in, most EMU nations will be in violation of this rule and it is not clear how much time the authorities will allow for the rule to be put back in force. An early imposition of the rule will lead to fiscal contraction and could hamper recovery.

That will be an extra problems facing Europe once we turn the corner into recovery.

Unemployment rate and changes
  Level Simple Changes
  May-09 Apr-09 Mar-09 3-Mo 6-Mo 12-Mo
EU-Urate 8.9 8.7 8.5 0.6 1.4 2.1
EMU-Urate 9.5 9.3 9.0 0.7 1.5 2.1
  m/m% % changes (ar)
EU-U 000s 1.8% 2.6% 3.2% 7.8% 19.8% 31.3%
EMU-U 000s 1.9% 2.8% 3.0% 7.9% 18.6% 29.3%
U-Rates Level Simple Changes
Germany 7.7 7.7 7.5 0.3 0.6 0.3
France 9.3 9.1 9 0.5 1.1 1.7
Spain 18.7 18 17.3 2.2 4.7 8.2
USA 9.4 8.9 8.5 1.3 2.6 3.9
Japan 5.2 5 4.8 0.8 1.2 1.2
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