Back to “Normal”?: European GIIPS unemployment data since 1990

This post was prompted by an exchange on Twitter with Libération correspondent in Brussels and prominent Euro-Federalist Jean Quatremer. Whereas Quatremer likes to write and tweet that the euro crisis is “over,”  an attitude I find incomprehensible given the persistence (and worsening) of Depression-like levels of unemployment in certain countries. (In this Quatremer is in line with similar statements by Barroso, Van Rompuy and Hollande.) Quatremer and I recently had the following exchange:

Translation: @craigjwilly the unemployment rate was the same in 1996 in Spain. The country is paying the price of corruption and the property bubble.

This kind of information provided during Twitter debate is exactly why I love the service. So I decided to explore the data: Is the euro crisis then nothing exceptional? Just a “return to normalcy” for the peripheral countries which, in the cases of Italy, Ireland, Spain, Portugal and Greece, are all traditionally famous for economic failure and emigration? Or are things fundamentally worse than before?

Here is Eurostat data back to 1990:

Unemployment in the EU and the GIIPS since 1990 (Eurostat).

We see that EU unemployment today, while high, is not exceptionally worse than in the 1990s. Today unemployment is at 10.7% for the EU as a whole and 11.8% for the eurozone, while if one looks at the EU15 (“Western Europe”) since 1993 we have a peak of unemployment of around 10.5% in the early 1990s. In aggregate, euro crisis unemployment is not at all comparable with the joblessness of previous existential economic crises (e.g. the 1930s Depression).

How about by country? Quatremer is right to highlight Spain’s history of massive unemployment, however, he is wrong on both the timing and extent of Spanish peak unemployment. Spanish joblessness peaked at around 21.4% in 1994. Spain again reached that level over two years ago and has since reached 26%, almost points higher, hardly negligible. Joblessness is set to get much, much worse as Spain still needs to implement massive cuts to bring down its deficit (must be reduced from 7% to 4.5% in 2013 alone). The current crisis in Spain is significantly worse than in the 1990s, but the experience of +20% unemployment is not unprecedented.

Ireland actually had higher unemployment in the early 1990s (peak 15.6%) than today (14.6%). The same is true of Italy (1990s peak: 11.2%, today 11.1%).

In contrast, Portugal, really quite a poor country when it joined the European Community, is now experiencing unemployment twice as high as anything it has experienced in the past three decades: portugal-unemployment-rate  Similarly, Greece is experiencing a veritable Depression: greece-unemployment-rate The country also did not have high unemployment in the 1980s and 1990s. Greece is experiencing 2-3 times as high unemployment as anything it has experienced in the past three decades. Compare this with the de facto leaders of the eurozone, Germany and (to a lesser extent) France:

Unemployment in France and Germany since 1990.

Even if the eurozone as a whole is underperforming, Germany is doing well and France is in line with the poor-to-mediocre 8-11% unemployment figures the French have been used to since the presidency of François Mitterrand (three decades). French unemployment today (10.5%) is still significantly lower than the 1997 peak of 11.1%.

The recent historical experiences of unemployment in the different countries are fundamentally different: For some (Portugal, Greece, Spain) the euro crisis is creating unprecedented Depression, for others (Italy, France, Ireland) the crisis marks a return to underperforming “normalcy”. This accounts for the wildly diverging perceptions of the crisis in different EU countries. For none of the eurozone’s de facto leaders Berlin, the ECB (e.g. eurozone in aggregate) and Paris is the crisis exceptional or unprecedented in terms of the socio-economic well-being of their own citizens. In most individual countries, the economy is either good, passable or has returned to the usual mediocrity of the past.

Why is the eurozone doing worse than the U.S. and Japan?

European unemployment today is the worst its been in the past three decades and its significantly worse to trends in the U.S. and Japan. Why?

UnemplChart copy Notice how U.S. and eurozone unemployment briefly equalized in late 2009 and then diverged massively, especially from 2010. This can be attributed to two sets of differences. First, growth-killing (at least in the short-term) austerity and hard money are hard-wired into the European Treaties as the automatic economic policies of the eurozone (inflation-targeting, 3% deficits, no public debt refinancing by the central bank), regardless of what elected officials in either the European Parliament or national governments think.

So we have:

  • Obama’s stimulus vs. Merkel’s austerity: Eurozone deficits are, in aggregate, about half those of the U.S. The U.S. has Keynesian stimulus while Europe has recessionary austerity.
  • No quantitative easing: The Federal Reserve and Bank of England have been lending huge amounts of money to governments and banks to stimulate the economy. The ECB, loyal to its Bundesbank precepts, much less so, and eurozone governments by law must almost exclusively rely on (expensive) loans from the private sector to refinance.
  • No devaluation: The ECB, faithful to its hard-money mandate, has successfully maintained the value of the euro while those of the dollar and pound have declined. This however means eurozone competitiveness must be regained almost entirely through growth-killing wage decreases.

Europe has made the choice of anti-Keynesian deficit-reduction and hard money, which at least in the short term means increased unemployment and less growth. This is a trade-off. Personally I think the economic and social damage in Europe is gratuitous and cruel, but perhaps the European (German) way will enable the Continent to live truly “within its means,” without resorting to the (unsustainable?) monetary and fiscal hocus pocus of Anglo-American Pumpkapitalismus. Second, we have the problems of the eurozone as a multinational currency union in and of itself:

  • The eurozone’s flaws: The eurozone’s status as a non-genuine economic and monetary union” has meant an another growth-killing burden in addition to those described above, in particular, the risk of Lehman-style sovereign default/euro exit of a country creates massive distrust among investors about whether the periphery and even Europe itself are stable.
  • The eurozone’s existence: The inability for individual nations to devalue means adjustments for competitiveness between eurozone countries have to be done through reducing wages, far more recessionary than devaluation.

Given all this, the eurozone’s austerity bias and its structural flaws, perhaps it is surprising that the eurozone economy isn’t doing worse. I suspect the U.S. is still artificially stimulating its economy far above the country’s “normal”/sustainable consumption level and above its real productive capacities. The “triple-dip” British economy is remarkable in just how bad it is doing basically like Italy despite massive U.S.-style devaluation, deficits and quantitative easing (all, incidentally, only possible thanks to the pound).

In any event, this massive divergence between the two American Keynesianism vs. European austerity was programmed in by the Maastricht Treaty as was apparent to informed observers at the time. (In particular, Paul Krugman noted in 1998 that the ECB was preprogrammed to adopt a hard money/anti-stimulus attitude in crises and both politicians like Philippe Séguin and economists Dyson and Featherstone noted that Maastricht meant that anti-Keynesian austerity policies would automatically be implemented in recession.) Because of the euro, European unemployment, at least in the short term, is remarkably higher relative to the U.S. than it would otherwise be.

Conclusion

The eurozone crisis has caused the highest unemployment in the European Union since its creation. However, only in Spain, Greece and Portugal are levels exceptionally high. In other countries, the levels are not without precedent, either being better or in line with unemployment in the 1990s.

This is a difference American observers should understand: the U.S. as a society cannot survive with high unemployment, hence the need for constant fiscal and monetary stimulus and debt-driven growth. European nations, often very “Malthusian,” are used to lower levels of consumption and often high structural employment. “Europe” is underperforming, but there is no unprecedented crisis in most countries and certainly not in the dominant nations. Hence why European policymakers, particularly in Frankfurt and Berlin, have been so keen to simply stay the course.

The “non-genuine” economic and monetary union that is the euro has accentuated boom-and-bust cycles (notably by enabling massive financial bubbles in the periphery) while eliminating adjustment mechanisms (default, devaluation). In addition, the eurozone does not have adequate labor mobility or a central budget. American economists, notably Martin Feldstein, predicted this would have profoundly negative economic consequences:

[T]o impose a single interest rate and fixed exchange rates on countries characterised by inflexible wages, low labour mobility and lack of centralised fiscal redistribution, would achieve nothing except increasing the level of cyclical unemployment among members of the single currency.

This prediction has been entirely confirmed: the eurozone is a suboptimal and economically inefficient currency area in which adjustments are more painful and take longer, resulting in lower growth and higher unemployment. However, the higher levels of unemployment are not necessarily so high as to cause secession of a Member State, let alone collapse of the eurozone.

Let us go back to our original question: Are Quatremer and European leaders right in declaring victory and the euro crisis “over”? Assuming that eurozone leaders can gradually put their current plan in place Fiskalpakt outlawing chronic deficits, unlimited ECB lending to governments, and a banking union guaranteeing financial sector debt there’s no reason the crisis can’t be theoretically overcome. I mean that EU leaders’ plan, unlike between 2010 and 2011, is not on its face blatantly self-contradictory. We would then have a gradual recovery, though almost certainly slower than if hadn’t been for the euro.

The question is whether the geographical concentration of unemployment will not cause a political breakdown in an individual country and thus (again) spark a Europe-wide economic crisis. Greece and, especially, Spain will have Depression-levels of unemployment for years to come. Youth unemployment is reaching unprecedented levels, and indeed levels at which regime collapse is not unusual (and Spain is not a small country): 20130124_spaingreece_0 There is still every reason to be alarmed. For persuasive debunkings of the “euro crisis is over” thesis, see also Paolo Manasse’s chart-essay on Vox and the ever-excellent Ambrose Evans-Pritchard at the Telegraph.

A note on context: Just a remark for the economic historians among us. European unemployment was also higher than normal in the early 1990s. There was a recession in the early 1990s, mostly forgotten, it was notably caused by a sharp increase in interest rates by the Bundesbank, which feared inflation as a result of heavy deficit spending by the German government caused by Reunification. The increase in lending costs for businesses led to recession and higher government deficits, prompting governments across Europe to raise taxes and cut spending to keep their debt levels low, so as to qualify for membership of the euro, which in turn worsened the recession. The parallels with today are striking both in terms of the economics and the fighting between Paris, Berlin and Frankfurt. Indeed this period also saw extremely tense Franco-German relations during the “battle of the franc.” President Mitterrand told Helmut Kohl at the time: I am aware of the independence of the Bundesbank, but what does it want? To remain the last one standing in a field of ruins? The early 1990s recession, necessary to create the euro, can be seen as a “test run” for today’s euro crisis.

14 thoughts on “Back to “Normal”?: European GIIPS unemployment data since 1990

  1. Protesilaos Stavrou

    Very interesting stuff and good job with the data-grubbing. As a general remark, I would be more cautious in regard to the American management of the economy. For the time being they still are capable of papering over their mountains of debts, but this will ultimately be unsustainable for the economy—and by economy I am not speaking of growth or of the state financing itself, but for the welfare of every person and for the qualitative aspects of life, such as the distribution of income, the formation of the capital structure, the interrelations between the various economic actors, the inclusiveness of democratic institutions (yes this too is an economic magnitude in the broader sense) etc.

    The world has yet to escape from the logic of the Bretton Woods system, even after so many years from its official demise. For decades the dollar has been the de facto reserve currency, offering the luxury to the Fed to repeatedly inflate away the instabilities that the financial system has produced and moreover, to finance the debt and deficits of the US government. Should the euro area overcome its crisis, should it rise as a stable political entity (it also needs to be an amiable polity otherwise the health of the currency will be undermined fast), we will eventually witness a shift away from the dollar towards the euro (not excluding other currencies of course). What you now consider as an undesirable hard-money policy will eventually become a polar of attracting foreign capital, just as the dollar did for so many years. You already know the mechanics of this, perhaps you did not realize it though, but you need not go further than review the dynamic you mention in the last paragraph of your text, where the Bundesbank (and Germany) effectively determined the pace of all of Europe.

    Lastly, I am of the opinion that you should not have so much faith in GDP growth or contraction. These are, or can often be, misleading. Think for instance that Greece or Spain enjoyed impressive GDP growth rates in the years prior to the Great Recession; a growth that was in its largest part thanks to the formation of bubbles, rather than the benign expansion of the roundabout methods of production and of capital accumulation. What I wish to say by that, is that beyond the macroeconomic magnitudes there is a complex, interweaving web of qualitative (non-chartable if you like) factors that are of paramount importance in actual economic activity and in understanding what is really happening, in its specificity and broader context.

    Reply
    1. craigjameswilly Post author

      Fair points:
      1) I completely agree on the United States, not only is its wealth, not established on any stable basis, but there is now a complete divorce between wealth and well-being (which is incidentally the etymological root of wealth). I am planning a post on this (American decadence).

      2) I am certainly open to the possibility that ordoliberalism is economically superior. There is something irresponsible and sloppy about the U.S./UK/Japanese models. The issue is whether this is so economically-disastrous in the immediate that it causes a breakdown. However, medium-to-long-term, if I were a currency investor Id have a lot more faith in the ECB than any other central bank, and perhaps Europe will eventually rise thanks to that.

      3) Agreed on the imperfections of GDP, if you have further reading on this (particularly on false growth in the UK/Irish/Greek/U.S. style where GDP masks underlying debt problems), please share.

      Reply
      1. Protesilaos Stavrou

        Starting from point 3, I can only recommend less historical and more theoretical works (I guess I have a penchant for the latter). There is a plethora of books along these lines that I could recommend. For a post-keynesian approach you may opt for Hyman Minskys Stabilizing an Unstable Economy (I enjoy the epistemological insights, though I still have doubts on the policy prescriptions). For a radical subjectivist approach go for Ludwig Lachmanns Capital and its Structure, and whatever you do, you should look into G.L.S. Shackles Epistemics & Economics: A Critique of Economic Doctrines (this one is a must). Of course these are starting points and once you read them, you will eventually be led to other works. Inquiry is an open-ended process after all.

        Point 2: It may be the case that ordoliberalism is better than the capitalist model(s) of US/UK/Japan, however I would not couch the comparison in the terms of systems being better or worse than one another. To cut a long story short, I would say that we need to have a look into the culture—the institutions— underpinning economic activity. The ordoliberal type of state and economic order is good for those who are already living in accordance with its tacit commands and its primary rules. This is something we already recognize in the phrase that we cannot all become Germans—whether this is actually true or not is not the point here, since what I wish to suggest is that the effectiveness of a system is dependent on the behavior (compliance) of the subjects acting in its context. Concerning the short vs medium/long term, I agree with what you suggest.

        And on point 1: waiting for that post then ;-)

        Reply
  2. Frances Coppola

    The Bundesbanks tight monetary policy during reunification wouldnt have had such an effect if it hadnt been for the existence of a managed exchange rate mechanism (the ERM) in which the Deutschmark was dominant, and the fact that some of its partner countries in the ERM were in recession due to the Savings and Loan crisis. The UK actually didnt join the ERM until 1990 but prior to that Chancellor Lawson chose to adopt an unofficial peg to the DM at what many considered to be too high a rate. The UK was eventually forced out of the Exchange Rate Mechanism by sustained speculative attacks on its currency similar to those on Greek, Spanish and Italian bonds in the last two years. Italy and France suffered similar speculative pressure, which eventually forced the EU to widen the bands to enable their currencies to devalue. Unfortunately lessons were not learned from the failure of the ERM and the Euro was created with exactly the same structural problems but without the option of revaluation or exit. The appalling recession and structural unemployment in Greece, Spain and Italy is entirely due to those structural flaws in the euros construction.

    Reply
    1. craigjameswilly Post author

      I am inclined to agree, kind of amazing the extent to which exactly nothing was learned from the early 1990s crisis (either then or now).

      Reply
    2. Protesilaos Stavrou

      The ERM did indeed increase the intensity of the Bundesbanks policies, but it was not the cause of its hegemony (the word must be taken lightly). In general terms fixed exchange rates are an ideal opportunity for speculators and all will eventually produce suboptimal results for many of those involved (let us not speak of the limitations of older monetary systems that were predicated on such fixed schemes).

      However concerning the failure of the ERM, I would suggest that the fixed exchange mechanism (with the margins it had) is not identical to a single currency and that the latter is, in relative terms, preferable to the former, since there is a central bank which is supposedly in place to provide a backstop to existential asymmetries. This will become more pertinent once the EMU develops the federal institutions a single currency needs. The ongoing federalization of the euro area, at least in financial terms, is expected to be brought into being within the next couple of years or so (ceteris paribus if you like) and until then we will continue to witness the same sort of politics and economics that no one enjoys Also in the upcoming European Council meeting we can expect to see some blueprint for a Euro area budget (probably to be followed up with plans for a Euro-specific chamber or special committee within the European Parliament).

      It is true that the introduction of the euro produced those erratic capital flows that fed into the peripheral bubbles and sustained the increasing leverage of core country banks (though there were other concomitant causes as well)—in other words it produced a near-decade of unsustainable economic activity (and for some cases where persistent structural flaws existed, this was disastrous). In that respect it should be criticized as a failure or an unsound choice.

      However, if seen from the perspective of strategic politics, of the why behind the very inception of the euro, the common currency is a relative success, since it is bringing, through the back door, what it was actually meant to: a federal state within the EU architecture, as a presumed panacea to the crisis and as a response to whatever other challenges, perceived or real, the EU/Eurozone is or will be facing.

      Of course in stating the above, I am in no way approving of such stratagems. I am merely presenting (in very broad terms) what I perceive as happening.

      Reply
      1. Frances Coppola

        So far the ECB has in no way acted as a central bank of the kind that exists in other federal structures such as the United States. Nor does it appear to have any plans or mandate to do so. I am also personally unconvinced that the political will exists to create a federal state within the EU architecture: the entrenched opposition in some quarters to the very idea of common debt and fiscal sharing seems to rule it out for the foreseeable future. I fear this will not end well. Of course, I may be wrong.

        Reply
        1. Protesilaos Stavrou

          Before adding any further comments, I may also recognize the good possibility of me being totally wrong in what I suggest. This is a tacit recognition for all my activity, but since you mentioned it, I thought it would be better to state it explicitly.

          On to the claim about the ECBs half-backed action or inaction: The ECB has certainly done less than its major counterparts in terms of easing or loosening its monetary policy, however if this statement is taken as such it can be misleading for two reasons:

          1) False benchmark: The comparison with other major central banks in an effort to say that the ECB has done little, rests on the implicit proposition that these other banks are the appropriate benchmarks and that their monetary activism is the normal approach in dealing with a crisis. In quantitative terms the comparison is a legitimate one (assuming the crises are of an very similar anatomy—are there?), but if we are to make any value judgements, of whether the ECB is a villain or hero, whether it has done enough or too little, then we must first engage in a rigorous examination of the tenets and practices of these other central banks and question their validity and effectiveness, in their specificities. We must also consider the *context* in which these other banks do whatever it is they are doing, otherwise our comparison will remain oblivious to the broader picture; a perspective that is necessary to appreciate the less visible, yet cardinally important, factors that contribute to economic activity (to political economy if you prefer). I am of the impression that without the context, there is very little that can be said, in a strict and proper sense, which leads me to my second point,

          2) The Eurozone is not a state (yet): In general, I am cautious or skeptical of comparisons along a selective of macroeconomic indicators, for a number of epistemological reasons concerning the magnitudes as such, but also because there can be wide differences between countries/economies, which are not evident in pure quantitative terms, yet which are essential to daily economic conduct. In particular, I am now referring to the operation of institutions, both in regard to their absence or existence and with respect to the behaviors and expectations they facilitate or engender. This is opens the sluice gate for a quite long discussion, but in very short, I will say what is already well known, viz. the Euro area is not a state (not yet) as it still lacks a fiscal union, a financial/banking union and lastly a political union. As I noted before, there already is legislation to be promulgated-voted-implemented which will fill in these gaps and it will start by the formation of a financial union within the eurozone and a banking union across the EU (about the fiscal union we will know more after the next European Council summit—political union is the most difficult of all).

          Concerning the expectations fostered by institutions, I will limit myself to pointing out that the ECB, just like the Bundesbank in the past, has never provided any well-grounded expectations on loosening its monetary policy to the degree other central banks have done and still do with alacrity; in other words it has cut short any self-fulfilling prophecies on central bank support (by the way expectations is perhaps the one theme, the subjectivist/relativist theme, Keynes must be truly congratulated for—by the way, what is today called keynesianism has little to do with Keynes views in their original form). The ECBs inaction, which is not truly so, is a given for investors and politicians, hence it is already sort of factored in to many economic and political decisions. With the Outright Monetary Transactions making the ECB an effective dealer of last resort, this is ever more so. In contradistinction the Fed/BoE/BoJ have a different tradition which has already prepared the grounds for self-invogorating expectations on vigilant activism in monetary affairs. The Fed for instance would have caused total chaos if it did not meet up to the expectations it created in the first place and thus had to do whatever it did/does even if that meant/means entering a vicious cycle (whether this is a sound approach is another issue).

          I also touched upon some related topics on this issue, in a previous comment http://www.craigwilly.info/?p=1804#comment-4881.

          Thanks!

          Reply
        2. craigjameswilly Post author

          I tend to agree with Frances. The strange federal (crypto-)State formed by the crisis will not be governed by majority rule and will not have a significant central budget. The Germans will never accept structures where they would be outvoted by irresponsible Latins and where they would pay. At best they will pay short-term, to end the crisis and save the euro, but they will ensure permanent structures are designed entirely according to German preferences.

          In terms of the strategic objective, there are too many factors to deem the euro an ultimate failure. Certainly so far the results are mediocre-to-catastrophic. And in terms of French objectives namely the end of German economic hegemony it is worse than a failure, as it completely backfired.

          Reply
  3. Euronomist

    First of all I have to say that the article, the data and the comments are all extremely interesting. I would just like to add something to the whole discussion:

    What strikes me with great amazement is the fact that we fail to learn not only from our mistakes and misfortunes but from the mistakes and fortunes of others. For example, the ERM Frances Coppola mentions is extremely similar to the gold peg nations adhered to after WWI. Experience taught us that this could only lead to catastrophe yet we just had to try it.

    If I remember correctly it was during the ERM phase that George Soros issued a speculative attack which yielded approximately 1 billion dollars of profit for his fund. Can we blame speculators? I think not. If we create the circumstances for them to thrive then we really deserve what is happening to us. To use an analogy, it is if we are leaving our front door wide open and then complain that our belongings were stolen. Occasionally we need speculators to let us know that something is wrong. The same happened with the ERM in the 1990s.

    However, I am moving out of subject. The issue here is our unwillingness to learn from others mistakes. The Great Depression of 1929 is another example. If one has a look at Liaquat Ahameds Lords of Finance: Bankers who Broke the World book the situation is terribly similar. We only have to alter the country names.

    Germany (Weimar Republic) was forced to pay large war reparations and was thus had to slash expenses (even though notable economists including Lord Keynes were against reparations); the same as Greece now yet it is called debt. The result in the early 1920s was hyperinflation and a huge unemployment rate. Then nationalists rose to prominence and the results are more or less known. The setting does seem familiar doesnt it?

    What is even more amazing is the similarities between the US state of events at the time and the EU one now. The Federal Reserve was severely criticized by economists in the following decades for lack of intervention, both in fiscal and monetary policy. In addition, Herbert Hoovers inability to act only made the Depression deeper. It was only when sufficient fiscal and monetary stimuli were brought forth by FDRs election, (policies to which the Federal Reserve was against at the time!) that things began to take a turn for the better.

    Similar conditions should remind us of similar remedies. Unfortunately, they remind our politicians of irrational decisions of inane austerity measures. Old prejudices? Obsolete illusions? Adherence to politics and policies of a long-gone era? I do not know. The point is simple: we cannot make the EU move to greener pastures if we persist with the same measures that we have known to wreck havoc in the past.

    P.S. For a more academic view of the subject I would recommend Irving Fishers The Debt-Deflation Theory of the Great Depression (since 1933!).

    Reply
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