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Economy in Brief

Euro Schism As The ECB Gets Ready To...
by Robert Brusca  April 4, 2011

In the US we complain that unemployment is so high. But in the US recession the rate of unemployment jumped sharply while Europe's rate only drifted higher by comparison. For a while US and European unemployment rates were roughly similar. Now the rate is lower in the US than the blended rates in Europe for EMU and EU.

That is the story of the chart, above, but the table contains a much more complicated story when we begin to see what goes into the making of the U-rate for Europe. Germany and France like the US and pre-disaster-struck Japan, show a steady diet of declining rates of unemployment. The aggregated/ weighted EU/EMU rates are on a dropping path too, largely due to the weights placed on the large European economies that are doing well.

Spain and Ireland are seeing their respective unemployment rates rise. Portugal's U-rate is up except for over the recent three months. The lagging data for Greece and the UK also show pictures of countries with still rising unemployment problems. The rates in Spain, Ireland, Portugal and in Greece are in double digits.

In Europe there is a better safety net to fall into when unemployment comes knocking compared to the US. Still, the US situation for unemployment is now slightly better than it is for Europe, at least on the numbers. The German rate is 2.5 percentage points lower than the US rate. Its progress is solid as its rate has dropped by one full percentage point over the past year compared to the US where the rate has dropped by 0.8% points over that period. And, despite some controversy over what that rate drop means in the US, the US economy now has the fastest dropping unemployment rate over three-and six months across this group.

Despite the US kicking into gear and starting to show some substantial job growth, Europe is on a two track program (or more). The German economy is more or less on its own, flying high. The rest of the zone is either growing moderately or floundering. And the ECB seems to be getting ready to hike rates because of what Germany is doing more than what the rest of the zone needs...

Europe has what we would call in the US a huge GDP gap, GDP is far below its potential. Germany's own gap may not be so large but in assessing policy options what is the ECB aiming policy to do? Is it trying to run monetary policy for Germany or for the Zone? And with so many Germans on the ECB research team and with Germany as the strongest European economy, this is a good question. The ECB seems to view inflation trends in German as something special for the zone. This is a judgment call. If it is the right one what does it mean for Spain under pressure and with a 20% plus unemployment rate? The weak countries in the table all have adopted austerity programs, as they were urged to do by Germany as a condition for backstopping the European fund. Does this count for nothing in the ECB decision-making process? Europe needs a plan to deal with a region that is not going in one direction. Is it going to pretend that the Bundesbank is still running policy or it going to make policy with an eye on its blended data? We are about to find out.


Unemployment rate and changes
Rate Level Simple Changes
  Feb-11 Jan-11 Dec-10 3-Mo 6-Mo 12-Mo
EU-Urate 9.5 9.6 9.6 -0.1 -0.1 -0.1
EMU-Urate 9.9 10.0 10.0 -0.1 -0.1 -0.1
Unemployment Rate and Changes M/M% % Changes (AR)
EU-U 000s -0.4% 0.1% 0.0% -0.3% -0.1% -0.1%
EMU-U 000s -0.5% 0.0% -0.5% -1.0% -0.9% -0.2%
U-Rates Level Simple Changes
Germany 6.3 6.5 6.5 -0.3 -0.4 -1
France 9.6 9.6 9.6 0 -0.2 -0.3
Italy 8.4 8.5 8.4 -0.1 0.1 0
Spain 20.5 20.4 20.4 0 0 1.2
Ireland 14.9 14.9 14.8 0.4 1.1 1.9
Portugal 11.1 11.2 11.2 -0.1 0 0.6
USA 8.9 9 9.4 -0.9 -0.7 -0.8
Japan 4.6 4.9 4.9 -0.5 -0.4 -0.4
Lagging Dec-10 Nov-10 Oct-10 3-Mo 6-Mo 12-Mo
UK 7.9 7.8 7.8 0.1 0.2 0.2
Greece 14.1 14.1 14.1 1.1 1.9 3.9
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