EMU Unemployment Continues to Fall Lowest in Eight Years

The lowest unemployment rate in eight years is an accomplishment for the EMU. But of the 11 original members whose data are arrayed in the top of the table, only five have unemployment rates below their respective medians since 1991. They are Germany (whose rate just hit a new post-reunification low), Belgium, Spain, Ireland, and the Netherlands. Finland and France are close to that benchmark with queue rankings in their respective low 50th percentiles. But four countries are quite far from making true progress; they are Austria, Italy, Luxembourg, and Portugal. For them, unemployment rates have been higher less that 30% of the time.

The verbal war over what ECB policy should be was re-engaged this week as Mario Draghi surprised some with his assertion that despite progress in the EMU low rates and stimulative monetary policy were still needed. Today the preliminary inflation data showed that EMU inflation moved lower in May; the headline price gauge shows a 12-month gain of just 1.4%, below its target of 'just under 2%.' Core inflation is up by just 1%. In Germany, headline and core inflation each fell by 0.3% month-to-month. The German HICP is up by 1.3% year-on-year and its core rate is up by 1.3% as well. It would appear that simply on inflation terms alone Draghi's judgement is being vindicated.

Turning back to unemployment, certainly the euro area would want to make better progress on unemployment than this. The EMU-wide rate is below its median, but barely at a 47.4% queue standing. And while Italy is one of the large economies making progress, it is doing so with great difficulty. Still, Italy surprised us with an outsized drop in its unemployment rate (still the second highest among the group of original members).

Finland, France, Italy, Portugal, and Spain all have unemployment rates of 9% or more. Obviously, there is still a long way to go. Against this background, the Draghi analysis seems to be spot on. In the U.S., policy is involved in its second year of ambitious tightening goals. In 2015, the Fed began its tightening and followed with a plan for four rate hikes calling it moderate. But in fact, the Fed was not able to hike rates against until end-2016. Now in 2017, the Fed has managed to follow the 2016 rate hike with more. But the plan to continue is now in some jeopardy. Draghi is learning from these sorts of setbacks. The U.S. is not the only place where tightening moves or plans have been made and have had to be scaled back. The Fed may yet be able stay the course, but as of now the path to more hikes is not clear. Inflation has stopped rising in the U.S. and globally. OPEC's plans are still unresolved and at the moment unsuccessful. The path to growth is still challenging. The coming months will tell if the U.S. economy is up to it or not. Meanwhile, Europe has made some very solid, if hard won, gains and Draghi seems determined that the small amount of momentum it has achieved is not squandered. He is taking nothing for granted. That seems quite smart in cycle. In the 'new normal,' nothing can be taken for granted.