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Economy in Brief

EMU Inflation Stabilizes at 2.4% - but the Devil is in the Details
by Robert Brusca April 18, 2013

Unemployment remains high in the European Monetary Union. As of February the rate is 12% the same as in January both figures are up from December's 11.8%. In the EU unemployment rates have snaked up to 10.9% from 10.8% in January and 10.7% in December of last year.

Monetary union pressures may have subsided slightly as of February. The unemployment rate is up in only four countries: the Netherlands by 2/10 of a percentage point, Spain by 1/10 of a percentage point, Luxembourg by 1/10 of a percentage point, as well as France by 1/10 of a percentage point. Unemployment declines occurred in two countries: Belgium by 1/10 of one percentage point in Italy by 1/10 of one percentage point.

Still, looking at the union based on this set of 12 somewhat early reporters we see quite a spread in terms of unemployment rates: three countries sport unemployment rates of 6% to or less, three more have rates above 6% but below 10%, another three have rates at or below 15% but above 10%, three countries have rates in excess of 15% with two of those having unemployment rates north of 25%.

The rate of unemployment in the monetary union is a little more than a percentage point higher than in the EU, the customs union per se. The common currency arrangement reduces flexibility and because of the common interests and the difficulties that are emerged in member nations it has caused countries to undertake austerity programs that they may not have undertaken had they not been single currency members. The inability to let the exchange rate absorb some of the excesses creates rigidity within the community that has resulted in a higher rate of unemployment compared to countries that are in the customs union but not part of the single currency arrangement and have exchange rate options.

The number unemployed continues to grow faster in the monetary union than in the full trade union as well, with the number unemployed up by 10.3% over 12 months compared to 7.4% for the economic union as a whole. Over three months monetary union unemployment is up at a 6.8% annual rate compared with 6.1% annual rate for those were not in the common currency arrangement.

We see in this table evidence of what the IMF has called a three track recovery. We do not have data for the developing economies but we know that they are posting better growth rates than the rest of the world. What we see here is that the United States continues to fair much better than Europe. That's quite clear also from the chart that we present. European unemployment continues to move higher while US unemployment continues to move lower. However, some of the success we have to lay at the feet of contracting labor force participation rates, which in the United States, are contributing a good deal to the decline in the rate of unemployment.

Not only is there a three track system in play in the global economy but there also appears to be a multi-track system in play within the monetary union itself, as are just demonstrated. Among the 12 countries in the group in this table we can divide them into groups four groups of three members each, in wholly different levels of unemployment. What makes this more painful than having a multi-track international recovery is that all of these countries are locked in the same monetary union and one monetary policy must serve the needs of all. What makes that even more painful is that there are no fiscal arrangements within the monetary union with most of the patchwork help coming to countries through the policies of the European central bank. At the end of the day monetary policy is probably not the best tool deal with the kinds of geographical challenges that exist within the monetary union.

Increasingly there seems to be concerned about the viability of the union itself. In Germany small business are already said to be more interested in striking relationships with firms in developing nations than in other areas within the Eurozone because they are not sure about what's going to happen to the zone particularly among some of the troubled members.

The IMF has recently cut its outlook for global growth. The German institutes have just announced a small reduction in their outlook for growth for Germany although their assessment is still above the official German government projection. Still their outlook for 0.8% growth this year is pretty meager for an economy that is supposed to be the strong-man of Europe. Europe has yet to confront its differences and to decide how it will deal with them in the context of the euro-zone or whether that zone has outlived its usefulness. The second part of that statement is not yet on the table but I believe in time it will have to be because are too many irreconcilable differences and yet needy policy responses that to have to occur among European monetary union members.

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