EU and US on Different Paths for Unemployment: Why?

As of October the EU area unemployment rate has continued to move steadily higher. Among the key reporting EMU economies only Germany and Ireland have persistently declining rates of unemployment. Ireland's drop is from very elevated levels down to 14.7% currently. The German rate has edged down to 5.4% in October. Austria, Belgium and Finland have one month reductions in the unemployment rates as of October.

While data lag by two months in the UK and Greece it is on that shifted horizon that the UK is also showing persisting declines in its rate of unemployment. Recent UK data have continued to be encouraging as well. Greece, whose data also lag by two months, is showing persisting increases in its rate of unemployment.

The euro-Zone employment situation is quite stratified; four nations have rates of unemployment below 6%: Austria, Germany, Luxembourg and The Netherlands. Two have rates in the 6% to 10% range: Belgium and Finland. Three have rates of unemployment of more than 10% to 15%: France, Italy and Ireland. The two countries occupying the Iberian Peninsula, Spain and Portugal, have much higher rates Portugal at 16.3% and Spain at 26.2%, While Greek data lag, Greece's rate also is in the over 25% cohort. EU member The UK is in the moderate Zone with Belgium and Finland.

Comparing the current rates of unemployment to the average from the period from Jan 2008 to July 2006, the strongest EMU economics stand out for their unemployment performance. The German unemployment rate has dropped by 3.6 percentage points over the period and has benefited from the crisis. Unemployment rates are slightly lower in Austria and Belgium as well, two countries that are closely linked with Germany. Finland, France, Luxembourg and The Netherlands have seen their rates of unemployment rise in the recession by 0.8 percentage points (Luxembourg) to 2.2 percentage points (France). After that the damage is much more destructive.. For Italy the pre-crisis unemployment rate average of 6.3% shot up by an added 4.9 percentage points. Spain and Ireland saw unemployment rates INCREASE by a double digit toll. Portugal's rate nearly doubled as it rose by 7.5 percentage points. I think sometimes the magnitude of the shock of the crisis and its distribution are not properly considered when members are trying to decide what to do..

By comparison the US which is complaining of its own slow recovery has had its rate rise by 3.3 percentage points as of October. At 7.9% the US has a rate close to that of Finland. At 3.3 percentage points its rate rise compared to the pre-crisis benchmark is somewhat more than France and somewhat less than Italy.

With lagging data the UK increase in its unemployment rate is only 2.5 percentage points. A moderate setback compared to the group of original EMU members; Greece, also on lagging data, has the second largest rise in unemployment at 17.0 percentage points, second only to Spain.

What may seem odd is that Japan which had been in long slump, has been hit and hammered by persistent currency appreciation. It has been socked with terrible disasters as a tsunami, an earthquake, and volcanic eruptions devastated its economy and created a nuclear disaster. Yet Japan has only seen its rate of unemployment rise by 0.3 percentage points from its pre-crisis mark and at 3.9% Japan continues to show the lowest rate of unemployment among this group of countries.

Japan's experience belies the degree of stress its economy remains under. It has scrapped nuclear power and this shift has created a surge of energy imports to replace lost nuclear generation. Japan still struggles with deflation.

These metrics should help to cast some light on how hard it is to assess economic developments across countries. Japan is surely unique and is under much more stress that the level or change of its unemployment rate would suggest.

Germany's reluctance to help others in the Zone seems disingenuous by comparison given how much Germany has benefited in the crisis and given the role of its banking system (and condition of its banking system) in the crisis and in the period leading up to it. If those who borrowed too much are at fault how about those that lent to them excessively?

Despite these data Germany has been seeing some upward pressure in the number of unemployed. There is a growing expectation that Germany is about to head into recession. Angela Merkel has politicked hard to keep Germans from footing any more of a bailout bill but she has been sorely tested and it is widely believed that after the German elections next year Greece will get more debt write-offs. Germany is also exposed to great potential loses though the Bundesbank's target2 balances with the ECB. But those only become an issue if the Zone breaks up. It's one reason why Germany won't be leaving the Zone.

Europeans are sycophantically attached to the euro. It is their common currency, it is what holds them together and it is what is pushing them apart... But they do not really see it that way. Europeans see the euro as their greater unifying force. But, to an economist, the currency is supposed to service a country and currency is not supposed to be something that enslaves a nation. And, what's worse is that the increasing amount of stress being pushed down on austerity-afflicted economies is causing political instability. The euro has effectively enslaved much of Europe and a backlash is developing.

The process of going into the e-Zone the highlighted biggest worry as the ability of high-inflation Mediterranean countries fit in. Yet there were no mechanisms to adjust for that eventuality nor was there any monitoring of this development. And they continued to cook at higher rates of inflation than Germany but since the Zone was 'working' no one cared. But of course this is a problem that is cumulative and by the time its impact had accumulated it was too late to do anything.

The current mythology is that the Zone failed because of no fiscal pact. But it is the regional differences in inflation which pretty much identify the countries that faced the worst in this single currency arrangement. No one talks about the inflation differentials and the only thing Zone fixers seem to want to talk about are debt problems and debt to GDP ratios. Yet the real problem tearing the Zone apart is the differential in competitiveness across countries. Fixing this while staying in the same Zone is very hard and extremely painful.

Europe talks about using 'internal devaluation which is a pseudo name for deflation. Deflation has been ruining the Japanese economy for nearly two decades. In the US the Fed Chairman is all but standing on his head to avoid deflation in the US. Yet, for Europe this is a solution? For everyone else's it's problem but for Europe it's a solution? I don't get it.

While a Zone that is split up to float former domestic currencies or a two-tier or three-tier euro could be used to better manage the competitiveness problems, all Europeans scoff at that notion since they see the euro as a unifying feature. But it is only a currency. If Europe's tether is as weak as just this flimsy thing called the Euro and if it is willing to undergo all kinds of tribulation to keep this 'euro' thing' just the way they initially formed it (warts and all), it is a sad and desperate testament to European politicians. Their faith that their respective electorates really want Europe to be united- even if just in an economic way - must be pretty thin to think that all that holds them together is the euro. To be sure (as the unemployment rate data attest) few countries will feel that the Zone has served them well in the crisis. But when a company or a country is mismanaged that is often the case.

After it was formed, all euro-members seemed to use the e-Zone for their own purposes without any regard to what was good for the Zone or how their own national excesses would contribute to the demise of the Zone or create a negative feedback loop. A well-run Zone might have - and could still - benefit Europe. But it will always be hard to understand how the economic Zone will work if the politics remain fragmented.

One solution I propose would be to abolish national level statistics. Instead, carve the Zone up into economic reporting regions that DO NOT correspond to actual national boundaries and report data for those regions. Try to get the country level differences out of the front pages at least.