Meanwhile in Europe…(8). Unemployment, sales, industry

from Merijn Knibbe

A chronicle

1. Introduction. Dean Baker – Ricardian equivalence: 1-0

One of the more wacko ideas of fringe economists like Robert Lucas is Ricardian Equivalence: if the government increases taxes, cuts wages and sheds jobs, these people will directly start to consume more as future taxes will decrease. In the UK, they are trying this, but the opposite happens, as Dean Baker predicted. Even announcing that the government would increase taxes, shed jobs and cut wages led the English to consume less, while real austerity still has to bite – the Ricardian topsy turvy show. So, markets do not adjust overnight – as the classics knew but as the neo classicals seem to have forgotten. Well, in fact markets do adjust overnight, but not to changes in prices and availability of labor, capital and money, but to changes in demand – as is clearly shown by the graphs of industrial production in the EU.

Click to access 4-12012011-AP-EN.PDF

(Still not convinced? Compare the production graph with the Eurostat graph on orders.)

So, austerity economics do not restore production overnight. Of course, (almost) anybody knew that one already. But what about the a little longer run? As far as I’m concerned, austerity policies without deflation are supposed to need many years to work. Is something of this already happening to countries which pursued austerity economics some time ago, like Greece or the Baltics? Or is ‘Ueber-unemployment’ just leading to the demise of human and physical capital and the evaporating of economies? Below, I’ll give a short description of the economic state of the European Union.

2. Unemployment.

a. Something rotten in the state of Denmark.

Compared with one year ago, Greater Germany (Germany, Belgium, The Netherlands, Austria, Finland. In fact, Switzerland can be added to this group as it shows the same characteristics, but it isn’t an EU member) is doing great. Unemployment is declining everywhere. Sweden, which has its own currency, also knows an outright economic boom and a corresponding decline of unemployment. Is unemployment really declining everywhere in this area? No. One little country in the midst of all this buoyancy stubbornly resists economic recovery. Denmark, which some years ago neo-liberalized labor and mortgage markets, is subject to serious economic sclerosis and debt deflation and saw unemployment actually increase. As prices are on the increase, debt deflation will even hit harder, though Danish wages are fortunately increasing.

b. Transition countries: Okun’s curse.

Outside Greater Germany, the situation is bleaker, much bleaker. Unemployment in the GIPSD is rising, again (all compared with one year ago, recent developments are taken into account, however). The Baltics, which know ‘Ueber-unemployment of above 15%’, show no real sign of a recovery of the labor market, though the data for the Baltics are difficult to understand as there seems to be massive outmigration and as the economic crisis which hit these countries must have led to a ‘regime shift’ when it comes to the relations between production, labor and the like. The Polish situation might be a bad omen for these countries. Poland did extremely well, compared with all other European countries. Despite this, unemployment is increasing. Five percent growth is not enough to outpace productivity increases. Just as in the thirties in the USA, ‘Okun’s curse’ hits: an unprecedented increase in productivity caused by the very recovery, as all kinds of new technologies embedded in past investments finally start to bear fruit. The transition countries need double digit growth, again, to attain full employment – even when they cut a little back on those very long working hours which still are characteristic for these countries.

c. That country next to Ireland.

One of the least noticed but most significant consequences of the Great financial Crisis was the further demise of the economy of the United Kingdom. Except for the GIPSD, no other country knew such a lackluster recovery of industrial production. And except for the GIPSD, no other country already knows a double dip. Surprisingly and thanks to massive stimulus from the Brown government, unemployment is not yet in the double digit regions, but at the moment it is surely heading that way. The question of course remains why this massive stimulus did not provide better results. Anybody wanting answer to this question is required to read Steve Keen and to investigate mortgage lending/paying back in the UK, 2005-2010. Indeed: deleveraging beyond recall. Without the stimulus, the situation would even have been worse. At this moment, the only way out for the UK seems to be a combination of serious depreciation of the currency in combination with lessons in German (‘Der Krieg nicht nennen’ or something like that), or serious quantitative easing (which, as there is less spare capacity as in the USA, will sooner turn into an inflation tax, of course). By the way – this weeks ‘The Economists’ contains an weird article on London as a global hub – but who, except for the poor and the destitute, wants to live in a city with nineteen century sewers? And their coastal defenses need improvement, too.

d. France, Italy

High and stable unemployment, though not in the double digit rates. There seems to be some recovery.

e. The best.

The Netherlands knew by far the lowest unemployment rate of the EU: 4,3%. This harmonized Eurostat rate is however quite a bit lower than the 5,1% official rate. What did they do right? Since 1982, the Netherlands have pursued an export oriented strategy based upon wage restraint and an official dedication to ‘werk, werk, werk’ (jobs, jobs, jobs), the mantra of then prime minister Wim Kok, the unions and companies in the eighties. They were successful. Apart from Australia, no other rich country experienced job growth like the Netherlands. This was however also fuelled by one of the largest mortgage bubbles ever, which by now starts to deflate. The options mentioned are either not open to all countries (not all countries can have 5% of GDP current account surpluses at the same time) or not advisable. Also, there was some neo-liberalization of especially the down side of the labor market. But though I do see that wage restraint in combinations with exports worked, I do not see any evidence that more flexibility worked. And in fact, part of this flexibility has already been revised. The Dutch version of ‘Kurzarbeit’ was a smashing success, by the way, enabling companies to increase production fast and at low cost once demand picks up – it’s always better to dismiss managers than to dismiss people who do the real work (selling, designing, producing, transporting, those kind of things), as they have the tacit knowledge needed to succeed as a company.

Unemployment
	December
	2009	2010
Euro or euro peg
Greater Germany	6,9	6,4
GIPSD	15,4	16,7
Italy and France	9,2	9,2
Transition countries:
Baltics	17,2	17,9
Other transition	8,9	9,7
Floating currency:
United Kingdom	7,7	7,9
Sweden	8,9	7,8
Poland	9,1	10,0

3. Industry.

a. Wirschaftswunder 2.0

Germany does well. It already knew a large manufacturing sector which, at the moment, is increasing faster than comparable sectors in the UK, France, Spain and Italy. Considering austerity and it consequences in the UK and Spain, this will lead to a re-ordering of economic power in Europe. In the wake of this shift, Frankfurt might soon become much more important as a global financial center. But that’s speculation. Reality is that it’s not only Germany’s industry that’s doing well. Almost all transition countries do even better, when it comes to industrial production. For the first time in about 700 years it are not the cities along the Rhine and other rivers flowing into the North Sea which drive European economic development (Antwerpen, London, Amsterdam, Rotterdam, Hamburg, Bremen, Dusseldorf etc.). It’s a historic shift, from the Rhine to the Rhine and the Oder and the Danube. All three of which flow through or along Germany, by the way. But that’s the long term. Though production did increase in the Transition countries, the latest data are not all too reassuring – especially orders might, despite the latest 1,2% monthly growth, still show a declining increase. Italy and France show nothing. Remarkable: Sweden, which does well, knows a low growth of industry.

Industrial production, 2005 = 100					Orders, 2005 = 100
October-november, seasonally adjusted					Latest data
	2007	2009	2010		2010
Euro or euro peg
Greater Germany	119	105	113		114
GIPSD	110	90	86		97
Italy and France	112	93	98		99
Transition countries
Baltics	113	97	115		211
Other transition	133	119	129		136
Floating currency:
United Kingdom	107	93	96		106
Sweden	113	89	99		105
Poland	134	133	144		183

4. Sales

Retail sales are, for almost all countries, the most important constituent of total demand. The large fall in the GIPSD and the Baltics surely accounts for a large part of total economic decline, the difference with the other transition countries is clear. The most remarkable aspect of the data is in fact that the level of consumption in many transition countries is still so much up on the 2005 level. Only in Poland, Sweden, Belgium and the Baltics clear increases can be witnessed, though the increases in the Baltics are from a very low level and demand over there still does not reach even the 2005 level. It is interesting to compare Sweden with the UK. Sweden does well, the UK doesn’t. The large difference seems to be that Sweden did not know irresponsible lending as it its banking an mortgage sector in 1991 which, according to the IMF, was a smart thing to do. See this IMF report, which originates in 1998 and more or less spelled out the things which would happen ten years after (!). http://www.imf.org/external/pubs/ft/issues/issues14/index.htm

Retail trade, 2005 = 100
	2007	2009	2010	Short trend
Euro or euro peg
Greater Germany	104	99	100	zero
GIPSD	106	95	91	minus!
Italy and France	106	103	106	minus
Transition countries
Baltics	125	91	92	plus
Other transition	138	127	121	minus!
Floating currency
United Kingdom	113	113	114	zero
Sweden	107	109	113	plus
Poland	130	132	149	plus!

5. The lessons

Where does this leave us? Countries which do best, like Sweden, Germany and Poland, had relatively few private debts to begin with (though at the moment Sweden does put in quite some effort to change this) – private debt seems to have been a larger problem than public debt. Austerity policies are, at the moment, nowhere successful, with success defined as a level GDP which is more or less on trend and unemployment below 7%. Most of the austerity countries are, at the moment, in fact heading the other way. But that’s for now. Let’s wait what the future brings – while in the meantime restructuring the banking sector.