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Economy in Brief

Unemployment European Style: Déjà vu All Over Again
by Robert Brusca  October 28, 2011

The chart shows that one big difference between the US and the European rates of unemployment is that Europe has ‘always’ had a rate ‘this high’ and the US has not.
The table below tells another unfortunate tale, this one much grimmer; a tale of Euro-divisiveness.

Wishin’ won’t mend your schism - The overall EMU unemployment rate is 10%; it is higher than in the EU where it is 9.5%, and where countries share in the benefits of the common market but have exchange rate flexibility. Germany continues with a low unemployment rate of 6%, a rate that has fallen over 3-months and 6-months and 12-months. But the troubled borrowers in EMU are also troubled in terms of growth and in terms of being dogged by high unemployment. Spain’s rate rose in August to 21.2% Ireland’s rate is steady July to August at 14.6% Portugal’s rate is also steady July-to-August at 12.3%. Greece’s last-reported rate was in June and it stood at 16.7% and it had been steady there for several months although previously it had been on a clear rising trend. It’s hard to imagine that the unemployment rate in Greece is not still rising with all that has gone on.

Were they really ready to rumble? -- In the recent Europe debt negotiations - or perhaps we should refer to them as the all night European smack-down, since they sort of bottled themselves up in a room and vowed to stay until someone was victorious – there seem to be few real winners. France’s Sarkozy fought with passion for Euro-solidarity but in the end he admitted that the problem probably was that Greece was not ready for admission to the e-Zone when it was let in. Of course the EMU said that at the outset. But Greece’s entry was barely delayed, nothing that Europe objected to really got fixed, yet Greece was admitted and felt insulted by being left out of the Zone at its moment of formation. Greece now appears to have gotten its ‘revenge.’ German Chancellor Kohl had wanted the broadest group possible in EMU – be careful what you wish for… So what we saw is that politics got in the way of sound economics in the formation of Euro and now we see that such a practice continues. Greece is now inside, and like the famous Trojan horse, so are certain problems that the Zone cannot easily rid itself of.

The Mediterranean countries as a group probably don’t belong in EMU but no one will say that.

Another definition of troubled with the same result - EMU has group of countries that can easily be identified as highly indebted, with indelible current account deficits, with high rates of unemployment, that are also countries that run inflation rates that persist in being higher than the EMU average. That is a mouthful, but it also identifies the Mediterranean countries. I am not picking on them for their geography. And a few other countries sneak into that grouping as well. These attributes are linked. Countries that are undisciplined foster higher inflation rates which undermine growth and breed unemployment; they result in higher debt and deficit conditions. And foster moral hazard at the government level that may be even more of a problem in Parliamentary systems.

The Zone is really TWO Zones – Since the Zone was formed, Greece has had its Yr/Yr rate of inflation greater than the EMU mark 97% of the time. For Spain it has been 87% of the time, for Portugal 69% of the time, for Italy 67% of the time, for Ireland 65% of the time. The facts speak for themselves. These countries have been undisciplined and now lack competiveness; how can they stay in the same union with others that have been more responsible? Germany has had Yr/Yr inflation above the EMU norm only 10% of the time, France 23% of the time, the Netherlands 39% of the time, Austria 41% of the time, Finland 46% of the time. Euro nations fall into natural groups; some belong in one group others belong in another. Putting them all in one pot is wrong. Economic forces WILL sort them out.

Culture! European culture does not seem to be having a great effect on blending habits toward a euro-norm at least as far as inflation habits go. However, over the last four years a few of the high inflation countries have managed to perform relatively better. Portugal, Ireland and Spain are flirting with this potential improvement on the inflation front. But, among them, only Portugal stays in the group when we exclude the recent two years of economic stress when deeper downturns rather than culture may have played a role in price discipline. On balance country culture seems to be more entrenched than euro-culture seems to be have spread. And that is one of the problems. To be one area, one Zone, countries need to have many kinds of economic and cultural similarities. Some countries simply lack some of the most crucial features.

Competitiveness and paradise lost - The elevating of the price level in specific European nations is the most damaging phenomenon in the Zone since that has become a permanent feature that now fosters division in EMU. Lost competiveness is not just water under the bridge it is not just a heavier debt load to be borne; it is an impediment every day to being competitive. Every day a too-high price level exists it puts a country farther and farther behind the competition and creates the incentive for politicians to try to ease the pain by doing something that will only make it all much worse. The ECB is left trying to make one suit of clothing to fit all body-types: bring on the spandex and close your eyes because the results will not be pretty. How can one monetary policy suit Germany with a 6% unemployment rate (and falling…) and at the same time satisfy Spain with a rate at 22% (and rising)? Meanwhile, the Greek price level has grown by some 25% above Germany’s; for Spain it’s 20% above Germany’s, for Portugal 17%, for Italy 15%, for Ireland 14% and so on. These disadvantages make it an uphill climb for the troubled nations to keep pace in the zone let alone to growth their way out of their crisis... and it makes the ECB’s job impossible.

The Euro needs fault insurance because it’s built on one --The point I have hammered at and that no one wants to pick up on is that the Zone is divided and is as precarious as if it were perched on the major fault of a tectonic plate. Attempts to hold it together while nations are moving at intrinsically different speeds to different destinations cannot be successful. Quaking is inevitable. Regardless of the passion of Sarkozy, Spain and Greece and Portugal – and perhaps Italy - have simply lost a great deal of competitiveness overall and within the Zone. There is no mechanism to fix this. These countries also have run current account deficits for 12 years straight (11 out of 12 years for Italy)! How much clearer can it be that they are a special case within the zone and that without Herculean efforts they cannot stay there? Will Greece’s ancient gods be on their side; or Rome’s on theirs?

Sarkozy can go as ‘himself’ for Halloween - Sarkozy’s own remark will come back to haunt him, far beyond Halloween because the logical implication is that Greece was not ready for EMU and it currently is not suited to stay...And Greece does not stand alone in that regard. The EFSF is not the issue. Financing is not the issue. Culture, economic performance and some agreed role for the state are the issues that divide Europe.

Are the Greeks really ‘on board’ or just along for the ride? - Greek voters are all for national elections now. Papandreou is saying ‘no’. But in Greece the writing on the wall is clear even though the final documents are not yet finalized. Greece will not make it. Its people do not want this austerity. And they will need a ton of austerity to get where they need to go AND they will need growth, too. In order to go over both of those hurdles Greeks will have to work as never before and will have to hold down their wages since they are already at a competiveness disadvantage that is 25% worse Vs Germany than it was when they joined the Zone. And the Greek situation is repeated in Spain and in Portugal and to a lesser extent in Italy a country that might be able to make it or might not.

The very definition of futile - This week’s Euro-theater was not good entertainment for me. It was like watching a bunch of people in the biggest-loser competition which was a module in an Alfred Hitchcock thriller. The actors were undergoing great stress but a bomb was ticking in the background as they went through their paces. You wanted to scream, ‘Forget the weight-loss and get out of there.’ but no one listened. And so this week there is a biggest-loser winner but the bomb is still ticking and they are still oblivious and happy to have completed their task. When will Europe wake up? Will it take an ‘explosion?’ The current debt deal will give it some time, but this has been a lot of money wasted and now Europe is going to cut some deal with China that will further weaken Europe’s position in trade and erode its sense of self to put together a package that in the end does not solve its problems. This is the very definition of futile.

Déjà vu all over again - In the case in Europe, the political choices have won out over the logic of economics. But this crisis was an example of how, when that happens, the economics will catch up with you. The crisis was the catch-up. So in this deal Europe has found yet another political accommodation, a way to put some added distance between politics and economics. Yet from the very day that this deal was struck, the economics began encroaching on that lead and as surely as it happened once this whole scenario will happen again. It’s European ‘Ground Hog’s Day’ without Bill Murray. Its déjà vu all over again.

Man in the Mirror - Politicians can cut deals at every corner and in the end, cut corners; but the laws and forces of economics are like zombies in a horror film, they keep coming and they will eventually get you unless you pay attention to them specifically. You can’t run, you can’t hide, you have to face them and defeat them. When will Europe look itself in the mirror and see the real problem?

Unemployment Rate and Changes
Rate Level Simple Changes
  Aug-11 Jul-11 Jun-11 3Mo 6Mo 12Mo
EU-Urate 9.5 9.5 9.5 0 0 -0.1
EMU-Urate 10.0 10.0 10.0 0 0 -0.2
Unempl Rate & Changes M/M% % Changes (AR)
EU-U 000s -0.3% 0.0% -0.1% -0.4% 0.6% -1.3%
EMU-U 000s -0.2% 0.3% 0.0% 0.1% 0.6% -1.3%
U-Rates Level Simple Changes
Germany 6.0 6.0 6.1 -0.1 -0.3 -0.9
France 9.9 9.8 9.8 0.2 0.2 0.1
Italy 7.9 8.0 8.0 -0.1 -0.2 -0.3
Spain 21.2 21.1 21.0 0.4 0.6 0.8
Ireland 14.6 14.6 14.4 0.4 0.3 0.9
Portugal 12.3 12.3 12.5 -0.3 -0.1 0.1
USA 9.1 9.1 9.2 0 0.2 -0.5
Japan 4.3 4.7 4.6 -0.2 -0.3 -0.7
Lagging Jun-11 May-11 Apr-11 3Mo 6Mo 12Mo
UK 8 7.9 7.8 0.3 0.2 0.3
Greece 16.7 16.7 16.7 1.6 2.5 4.6
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