Rising Unemployment and Austerity in the Euro Area

The tide is rising and gaining momentum against austerity. The Dutch government was brought down last week over the issue and the Socialist candidate, Francois Hollande, who promises to fight the fiscal pact signed by members of the Euro Area, won the first round in the French election and is favored to win the run off on May 6th. Today The International Labor Organization released its World of Work Report 2012. It warns that fiscal austerity and tough labor reforms are causing unemployment to reach alarming levels. While the rise in unemployment is widespread, it is particularly notable in those countries in the Euro Area that are beset with budget deficits and debt problems. The attached chart shows the unemployment rates for Portugal, Ireland, Greece and Spain, compared with Germany.

The German experience is in sharp contrast to that of the other countries, its unemployment rate has declined throughout the past six years while the unemployment rates in the other countries have risen steadily. With the German unemployment rate, at the lowest levels since unification, the labor unions are becoming more aggressive. IG Metall, representing some 3 million workers is demanding a pay raise of 6.5%. Increasing wages in Germany relative other Euro Area countries would actually help redress some of the imbalances that have arisen over the past six years. Higher incomes in Germany would tend to increase imports from other Euro Area countries and dampen exports from Germany. This would not solve the problem but would be helpful.