Meanwhile in Europe...(9). Increasing differences, increasing strains (or increasing labor flows?)

from Merijn Knibbe

A chronicle

I. Regime change: May 1, a whole number of still existing labor mobility restrictions for inhabitants of new EU member states will be lifted 

II. Eurostat has published new data on GDP, industrial production, construction and unemployment. What’s happening? 

1. Northern Europe is (almost) booming! Differences within Europe seem to increase. The north shows strong growth. In Germany, unemployment is lower than before the Great Financial Crisis (GFC), per capita GDP is higher and the not-cyclical-adjusted-government-deficit runs at 3%, the cyclically adjusted deficit might well be 2% or even less. For Germany, the GFC is over. Some other countries are heading that way (table 1).

Table 1: Percentage increase of GDP compared with the preceding year (between parentheses: the most recent quarter)

Sweden                  +6,8 (III)

Finland                   +5,8 (IV)

Poland                    +4,7 (III)

Germany                +4,0 (IV)

In all these countries, employment is increasing while deficits are decreasing. And quite a number of other countries around Germany (Belgium, the Netherlands, Austria, the Czech Republic, with a combined population of 44 millions), though growing less fast than Germany, do also know growth, declining unemployment and declining government deficits (the Dutch 2010 deficit has just been revised from 5,8% to 5,2% due to higher than expected taxes). Growth in the Baltics (Estonia, Lithuania, Latvia) is, with 4,6%, about as high as in Poland, but considering the Great Depression levels of unemployment in these countries (15-20%), their crisis is still far from over. Even in Poland, which weathered the GFC much better than other European countries, December unemployment was, with 10%, 1%-point higher than a year before – despite an increase in employment! Denmark grew 3,6% in the year to the third quarter – recently it however seem to have slid into a renewed recession as unemployment is at the moment increasing very rapidly while industrial production shows a downward slide.

2. But Southern Europe does badly. Greece is experiencing a severe 6,6% drop in GDP with an accompanying increase in unemployment – a clear testimony to the importance of total demand for an economy as well as a clear example of a double dip. And of course a vindication of Keynesian ideas about the hazards of pro cyclical demand management – if anybody has any idea how Greece, after this severe policy induced double dip, will ever be able to pay back its debts, please speak out. Spain knows 20% unemployment and almost no growth, the Portuguese economy recently started to shrink. France and Italy, though not crimping, do not show any sign of escaping from a high unemployment situation. Much of the decline and stagnation in the Mediterranean countries is due to developments in construction, which in countries like Spain and Greece still is contracting with 20 to 30% a year while Portugal and France also witnessed considerable decreases. Industry does bad too, however, and production is still 5 to 15% lower than in 2005 and often still falling. In such a situation, companies know considerable slack and production can be increased at very low cost – but it doesn’t happen.

3. Ireland and England: the big sink. Both the Irish and the English economy are getting smaller, the English at a slightly faster rate. But as Irish shrinkage started earlier, this country is still leading this race to the bottom which started out so long ago with the property-price enhancing economic policies of the Thatcher era and beyond. High property prices and high prices of shares (better: high price/dividend ratio’s) may be good for real wealth of an individual – but a country as a whole does not get richer if share and house prices get inflated or when easy money leads to overinvesting in, for instance, houses. It’s one of the misconceptions of neo-liberal thinking, called as well ‘the fallacy of composition’ and ‘money illusion’ by old school macro economists. Not ‘shareholder value’ or ‘house prices’ but ‘net national value added’, including wages and mixed income, is the apt accounting yardstick to estimate prosperity – and this yardstick does, for good reasons, not measure increasing prosperity when it is just prices that increase. The same for mergers and acquisitions: it might make individuals more affluent, but productive capacity of the economy does not generally increase – these kind of investments do most of the time not increase the stock of capital or enhance productivity (though they do increase bankers incomes). What’s good on a micro level is not always good on a macro level. To change Mrs. Thatcher’s most famous quote just a little, “There is such a thing as society” – and we, economists, call this the macro economy. Even in the UK.  By the way: there has been some buzz about the influence of bad weather on British economic growth (there was some snow). In England, construction declined a considerable 15% in December and the economy shrunk with 0,5% in the last quarter. In Germany, however, construction declined with a whopping 24% in december – but the entire economy increased with 0,4% in the last quarter. It was not bad weather, it was a bad economy.

4. Eastern Europe: hope?  Developments in Eastern Europe are mixed. Employment in Bulgaria, Latvia, Lithuania  and Romania decreased with 4 and 5% (third quarter, year on year) – which is – considering rates of poverty and material deprivation – disastrous in a long term as well as in a short term perspective and which of course led to rising unemployment and, even worse, a declining labor market participation rate. And even countries where the number of jobs increases unemployment is on the rise or still sky high. All countries except Romania show GDP increases – but at the same time construction and industry in Romania are growing fast. It’s somewhat confusing, maybe Romania just turned the economic corner. When we compare the situation with “2005 = 100”, the comparative level of industrial production in the transition countries is however much higher than in any of the other countries, even Germany, while the increase of production is, on average, as high as in Germany or even higher. In some countries, construction is back on track, which might lead to much needed improvements in the housing situation. If, after may 1, labor mobility increases and as one euroe buys, according to Eurostat, two or three times the amount of new ‘house’ in Bulgaria as in Denmark or even Germany, this increase in building acitivty might get fuelled by inter-family transfers from northern Europe to the East.

P.S. – considering the Danish price level and its looming double dip, Denmark might soon have to devaluate.

P.P.S. – I do not exclude that this summer Europe will witness ‘USA’ levels of internal EU migration, as the number of jobs as well as the level of real wages are falling in southern Europe and in the Anglo Saxon area, while the opposite happens in ‘Greater Germany’. Already, people are leaving Ireland and the Baltics in droves though, as far as I know, migration from Greece and Spain is still limited.

Table 2. Industrial production and orders

Industrial production, 2005 = 100					Orders, 2005 = 100
October-december, seasonally adjusted					Latest data
	2007	2009	2010		2010
Euro or euro peg
Greater Germany	117	102	111		114
GIPSD	106	87	87		97
Italy and France	107	91	94		99
Transition countries
Baltics	114	98	115		211
Other transition	130	114	126		137
Floating currency:
United Kingdom	105	90	94		106
Sweden	108	88	100		105
Poland	131	129	140		183

Greater Germany: Germany, Finland, Belgium, Austria, The Netherlands. GIPSD: Greece, Ireland, Portugal, Spain, Denmark. Baltics: Estonia, Lithuania, Latvia. Other transition: Czech Republic, Slovakia, Slovenia, Hungary, Bulgaria, Romania.

Table 3. GDP	GDP, level, 2000 = 100			GDP, increase
				Growth over the	Growth over
Euro or Europeg	2007	2010		previous quarter	one year
Greater Germany	111	111		0,5	3,6
GIPSD	125	120		0,0	-0,2
Italy and France	111	108		0,2	1,4
Transition countries:
Baltics	176	148		1,6	4,6
Other transition	143	142		0,5	1,4
Floating currency:
United Kingdom	119	116		-0,5	1,7
Sweden	123	121		2,1	6,8
Poland	132	146		1,3	4,7

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