Unemployment Rate (percentage) in Eurozone and USA
(Calculated from Eurostat data)
Every picture tells a story – and this one should tell us several.
The unemployment rate across the Eurozone was fairly stable in the first half of the 2000s, and then fell substantially to a low of 7.3 percent in early 2008. Unemployment was considerably higher throughout the Eurozone compared with the U.S. in the 1990s, and labor market inflexibilities and a general ‘euroscheloris’ were often blamed. But by early 2008 the unemployment rate in the Eurozone had come closer to that of the U.S. though it still hovered 2 percentage points above. Many were quick to attribute this to the adoption of the euro as a single currency and the de-regulations of the European labor markets which occurred in the 2000s. Writing in 2008 on the tenth anniversary of the adoption of the euro (as a virtual currency in 1999, to be followed by its full circulation in 2002), the European Commission wrote that “employment has risen by almost 15% since the launch of the single currency while unemployment has fallen to about 7% of the labour force, the lowest rate in more than fifteen years. … The bulk of these improvements reflect reforms of both labour markets and social security systems carried out under the Lisbon Strategy for Growth and Jobs and the coordination and surveillance framework of EMU, as well as the wage moderation that has characterised most euro area countries” (European Commission, 2008, p. 6, emphasis added).[i] Reforms of labor markets and social security systems are of course a euphemism for deregulation, weakening of trade unions and reduction of wages and social security benefits.
What a time to write that – as unemployment was starting its climb from just over 7 percent in the euroarea to over 11.5 percent by the end of 2012. The impact of the financial crisis of 2007-09 is clear to see in unemployment rates of over 10 percent, and the addition of fiscal austerity programs raised the unemployment rate by a further 1.5 percentage points.
A clear message is starkly illustrated by these figures. ‘Flexible labour markets,’ deregulation, attacks on trade unions, and lowering wages do not bring full employment – or even high employment. What matters is the level of aggregate demand, including from exports and from investment. Once demand starts to decline, unemployment starts to rise – precisely what happened as a result of the financial crises.
Aggregate demand rules! Cutting demand through so-called fiscal consolidation does not raise (private) demand, reduces economic activity and employment, and is not even good at reducing budget deficits. The euroarea has made the basic mistake of responding to low levels of demand by cutting demand through austerity programmes. The nature of the ‘fiscal compact,’ with its focus on so-called balanced structural budgets leading each euroarea country to pursue austerity at the same time, can only make the employment situation worse. The figures above indicate that the U.S. suffered greatly in unemployment terms as the financial crisis took hold but has seen some recovery as fiscal and monetary policies have supported demand. The dangers now are that the U.S. will catch the European disease and resort to budget deficit reduction programs without thought to the deflationary consequences. The euroarea has now entered into a double dip recession as a result of its foolhardy fiscal policies: the United States will put its own recovery at risk with its attempts at fiscal consolidation.
[i] European Commission 2008. “EMU@10: Successes and challenges after ten years of Economic and Monetary Union.” European Economy 2, 2008