Posted: January 05, 2005

More bad Euro data

As a brief follow up to yesterday, German labour force data came out yesterday (Tuesday) and reveal that unemployment rose sharply in December and the disgraceful barrier of a record 5 million unemployed is now highly likely in early 2005. In December there were 4.48 million unemployed or 10.8 per cent of the active population. This is the highest level since 1990 and the second highest level in the whole period since World War II.

While the Federal Government is intent on letting its neo-liberal reforms take their course, the smart money is on a change of heart as next year there are elections and the German population will not tolerate unemployment above 5 million.

Also as a follow up, the expected protests accompanying the introduction of the new unemployment benefits reforms, were rather stifled. The BBC reported that "German protests over unemployment benefit cuts have got off to a slow start, but 15 people have been arrested during scuffles with police in Berlin. Organisers had called for big demonstrations in more than 50 towns and cities, but by early afternoon only about 10 were affected. In Berlin, protesters tried to break through a police cordon around a job centre, resulting in the arrests ... Police said about 60 protesters had attacked them outside the job centre in Berlin's Wedding district. Some demonstrators earlier forced their way into a job centre in Leipzig, eastern Germany, the AFP news agency reports."

The reality is that there is only tepid growth in Germany, and businesses are using capacity adjustments to meet orders. Private consumption is flat and most growth is coming from exports. In that context, the nonsensical stance of the ECB in refusing to deal with the overvalued euro is worsening the crisis.

But amidst all the gloom, we can surely expect some sterling analysis from the employer groups. Bertrand Benoit reports for the Financial Times today that "Dieter Hundt, chairman of the BDA employer association, rejected the suggestion on Tuesday, saying the latest statistics showed no sign of a labour market turnround and merely underlined the need for broader structural reform." The employers were not happy with the extent of reform proposed under Hartz IV, which will undermine the living standards of the most disadvantaged workers in Germany.

The plight of Germany is common throughout the Eurozone, but on the monetary policy front, things could not be more dissonant. There were hints on the euro financial markets today that the ECB's obsession with inflation has no limits. On Tuesday, Eurostat's December 'flash' inflation rate estimate came out at 2.3 per cent. Low eh! Slightly up on November's estimate of 2.2 per cent (annual). Well not low enough when you compare it to the ECB's 'target' rate of 'below but close to' 2 per cent. Anyway, now the ECB is considering increasing rates above the 2 per cent which they have maintained for the past 18 months because they are still historically below their 'normal' levels.

The Financial Times reporter Ralph Atkins today wrote in his article Warning likely as eurozone inflation rises that "last month Jean-Claude Trichet, president, revealed the governing council had discussed raising rates. Economists said the central bank may have been encouraged by recent economic data that suggested consumer spending in France and Germany - the eurozone's two biggest economies - might have recovered slightly."

Slightly! Not if the German unemployment trend is anything to go by. Further in the relentless quest for data, we note that the French statistical agency released its national account figures for the September 2004 quarter yesterday. The preliminary estimates had recorded a 0.1 per cent rise but now the final estimates record a growth rate of zero!!! Zero does not equal slightly positive!

You may ask the logic of this. Various neo-liberals who want us all to hark back to Wicksell claim that there is some natural real rate of interest which that ensures stable long-term real output growth. This is the natural rate theory dressed up a little differently. It is the reason there is intolerably high unemployment. It should be culled from our knowledge base.

As an economist, I lead a happy life!

Blog entry posted by bill