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:
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: Similarly, Greece is experiencing a veritable Depression: 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:
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?
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.
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): 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.