What part of the word failure don’t the Euro elite understand?

The – Eurostat homePage – today (May 1, 2012) told the story of policy failure. On April 30, 2013 there were two major data releases – Euro area unemployment rate at 12.1% and Euro area annual inflation down to 1.2%. Record unemployment and a contracting and very low inflation rate. That is recession. That is the average. Some nations are now experiencing the Great Depression Mark II. And still the policy leaders make public statements that things are easing because borrowing rates are down and fiscal consolidation is bringing deficits down. On May Day 2013 it would be appropriate for a major workers’ revolt throughout Europe to protest over the continued rise in unemployment and the failure of the elites to deal with it. The question that the riot could pose is: What part of the word failure do these leaders not understand?

It is – International Workers’ Day – today, aka May Day, which remembers the – Haymarket Affair – in Chicago (1886).

In May 1894, there were – May Day riots – in Cleveland, Ohio as a result of the unemployment rate increasing sharply due to policy failures in the wake of the – Panic of 1893 – which was caused by the collapse of the railroads (due to ridiculous free market expansion).

Maybe a May Day Riot of 2013 is in order, given the latest unemployment estimates from Eurostats and recent statements made by the EU/EC political leaders.

For example, the President of the European Council (EC) Herman Van Rompuy has been visiting Romania in the last week – presumably staying in very well appointed hotels, dining and drinking good faire and not in the slightest threat of losing his salary or pension when he retires soon (about a decade too late!).

He issued a press release during this stay in which he said that Europe had to:

First of all related to the economic and social situation in Europe, which remains a priority on the European agenda. In respect to that there are good news and bad news too. The good news is that we can see a substantial improvement of the situation, with higher financial stability in the Eurozone. Moreover, as regards the fiscal and economic fronts, we have received substantial positive signals, in terms of increased competitiveness, increased exports and safer public funding, with lower deficits. That’s why, we can say that the existential threat to the euro has been overcome. However, there are still bad news to be dealt with. The economic crisis continues, despite the success recorded in cutting unemployment, the situation in Europe is less than good, especially in what concerns the young people …

His media staff must struggle for creative ways of lying about the situation because Van Rompuy was quoted by Bloomberg (January 10, 2013) – Van Rompuy Sees Increasing Signs EU Will Resume Growth in 2013 – that Europe was poised for growth:

There are increasing signs that 2013 is likely to mark the end of the recession in the euro area … As growth returns, it also takes time before perceptible effects on employment start kicking in … [2012] … marked a turning point in the crisis: the euro zone is no longer in ‘existential threat’ mode … The gloomiest of expectations are slowly fading, and the integrity of our monetary union is no longer called into question, whether by the media or the markets … steadily decreasing … [budget deficits] … [and borrowing costs] … going down substantially in almost all euro-area countries … [are positive indications] …

But what about the claim that Europe is enjoying “the success recorded in cutting unemployment”.

Where in Europe does he actually mean? More later on that.

The Eurostat estimates show that:

The euro area (EA17) seasonally-adjusted unemployment rate was 12.1% in March 2013, up from 12.0% in February … rates have risen markedly compared with March 2012, when they were 11.0% … Compared with February 2013, the number of persons unemployed increased by … 62,000 in the euro area … In March 2013, 5.690 million young persons (under 25) were unemployed in the EU27, of whom 3.599 million were in the euro area. Compared with March 2012, youth unemployment rose by 177,000 in the EU27 and by 184,000 in the euro area. In March 2013, the youth unemployment rate was 23.5% in the EU27 and 24.0% in the euro area, compared with 22.6% and 22.5% respectively in March 2012. In March 2013 … the highest in Greece (59.1% in January 2013), Spain (55.9%), Italy (38.4%) and Portugal (38.3%).

Greece will exceed 60 per cent in the coming months.

The evolution of this disaster is clear from the first graph. The first part of that rise was between March 2008 until May 2010. Then with the rising budget deficits some stability was provided to aggregate demand and unemployment started to fall. The Eurozone would have then slowly recovered and followed the path of the US economy (probably).

But the second round of increasing unemployment was entirely policy induced. The policy makers, hiding behind the flawed fiscal rules, deliberately pursued fiscal policy changes which everyone knew would drive unemployment up. There will be no end in the process until they reverse the policy stance.

This is a monumental failure and all the talk of having to consolidate and achieve fiscal sustainability is meaningless when there has been no coherent analysis presented by any of the government agencies (anywhere) to show the temporal paths of the costs and benefits of their actions.

It is clear to see the massive costs – they are staring us in the face and are mounting every day. There can be no benefits great enough to justify this social massacre.

The following graph shows the evolution of the EU17 unemployment since the inception of the common currency compared to Japan over the same period.

These are the Great Depression Mark II nations, with more to fall into that category in the coming year.

The American economists, Walter Galenson and Arnold Zellner wrote a very interesting paper in 1957 – International Comparison of Unemployment Rates – which examined the historical behaviour of unemployment rates across a number of nations. It is one of the few sources of unemployment rate data (with documentation) for the inter-war period – that is, the Great Depression.

[Reference: Galenson, W. and Zellner, A. (1957) International Comparison of Unemployment Rates, in: The Measurement and Behavior of Unemployment, NBER, 439-584.]

The following graph reproduces their Chart 2 and shows the average unemployment rate for nine countries for six major periods from 1904 to 1950.

The graph shows the impact of the Great Depression on unemployment in the selected nations. It also shows how the massive fiscal stimulus that accompanied the prosecution of the war effort effectively eliminated the 1930s problems (in most nations).

The Great Depression taught us that without government intervention, capitalism is inherently unstable and prone to delivering lengthy periods of unemployment.

The Hooverian and British Treasury orthodoxy of balanced budgets, tried during the 1930s, failed. Full employment came only with the onset of World War II, as governments used deficit spending to prosecute the war effort. The challenge was how to maintain this full employment during peacetime.

Western governments realised that with deficit spending supplementing private demand, they could ensure that all workers who wanted to work could find jobs. As a result, very low levels of unemployment in most Western nations persisted until the mid-1970s.

If you look at Spain and Greece (with Portugal in pursuit) they are now recording unemployment rates of Great Depression proportions – both in level and persistence.

I also decided to check the claim by Van Rompuy about deficit reduction and unemployment reductions. The first graph shows the change between 2011 and 2012 (using the Government Finance data from Eurostat) in the budget deficit as a per cent of GDP.

Data such as this is difficult to interpret because of the cyclical component of the budget outcome. We do not know without further information whether the budget deficit increases are due to austerity killing growth on the back of some discretionary cutbacks or a due to the automatic stabilisers swamping attempts to stimulate the economy.

In the Eurozone case, we know that all the nations that have increased their budget deficits have been trying to reduce them. But there are complexities such as lagged effects, the relative strength of the automatic stabilisers and the such that need a case by case analysis.

The fact is that the countries that are mostly heading into Great Depression II are engaged in self-defeating cuts in discretionary net spending and

Van Rompuy’s claim – that Europe has enjoyed “the success recorded in cutting unemployment” – is pure delusion.

Maybe he has been spending too much time in Estonia or Germany. Estonia, you will note had the second largest increase in its budget deficit to GDP ratio and now has a ratio around 10 per cent of GDP. So there is a very strong stimulus coming via that deficit and that helps to explain why its unemployment rate is falling relatively quickly.

Also of interest is the above-average rises in some of the core Euro nations – Netherlands and Italy. While they are unlikely to head into Greek territory, their situations have deteriorated badly since 2011.

And when you consider this event started in 2007 and has a long way to play yet – the evidence of policy failure is acute.

Conclusion

As I said when last month’s Eurostat Labour Force data came out – it is hard not to conclude that the member states in the Eurozone are being governed by maniacs who have lost all sense of common purpose and have become so entrenched in their ideological madness that they are oblivious to the incredible costs that are arising around them (manifesting as massive human damage).

If I knew some other descriptors that would build on “maniacs” I would use them now.

This is really an extraordinary epoch in recorded human history. The triumph of ideology over evidence.

I also recently produced a working paper of the same title that you might be interested in reading – Full employment abandoned: the triumph of ideology over evidence. It is just a draft but errors aside it tells the story.

Now it is back to my Fantasy Budget 2013-14 preparation. I am making deep cuts to all forms of corporate welfare. That cohort often tell us they believe in the market and lecture all and sundry to get their snouts out of the public trough and work harder.

So my Budget will help them live up to their words. Billions (a few percent of GDP) are involved. That means I can switch a lot of dollars as I simultaneously expand the deficit to close the output gap (about 4 per cent) into areas that help people not greedy multinationals and the conservative wealth in Australia.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.