Home > Uncategorized > Post-war unemployment and the failure of neo-classical social engineering in the Eurozone. 4 graphs.

Post-war unemployment and the failure of neo-classical social engineering in the Eurozone. 4 graphs.

Eurozone unemployment is, with 12%, at a historical maximum. This average masks lower levels in the core while levels in the ‘periphery’ are beyond anything ever experienced in the developed economies, post WW II (see the graphs). This is a concern for the European Central Bank (ECB). This bank has next to its inflation fighting mandate a clear, legal, and binding prosperity mandate. The (neo-classical) idea was that just taking care of low and stable inflation was enough to guarantee low inflation as well as financial stability and a steady increase in prosperity and employment. This idea has after 2008 been compromised to its fundamentalist core. Which means that the bank has to find other ways to stimulate employment as much as possible. The question is: how does a central bank fight hyper-unemployment? Models and cherished convictions don’t help as the southern European levels are ‘out of sample’. The best anecdotical examples are probably Finland (see below) and East-Germany. Finland solved its high 1991 unemployment with, among other actions, a 40% devaluation. Around the same time a de facto policy of internal devaluation was introduced in East Germany – and East-German unemployment is at present still above 10%. It has come down from 20% – but only because the labor force declined with 30%. Which indicates that internal devaluation is just too slow and monetary policy has to be highly aggressive: buying government bonds, buying bad assets from banks, paying down mortgage debts of overly indebted households, “Whatever it takes”.

1. Post WW II, 12% unemployment was the limit, in core developed countries

1

Sources: CBS, INSEE, BLS, ONS, Statistisches Bundesamt

During the entire 1948-1912 period unemployment (U-3 concept) in countries like France, Germany, The Netherlands, the UK and the USA never crossed the 12% threshold (Graph 1). Caveat: these series are not homogenous in the sense that education, demographics, the pace of technological development, social security and labor market rules changed quite a bit. But even with that in mind it’s remarkable that even during the severe Volcker crisis of around 1981, when the policy interest rate in the USA went up to 21,5% and countries like Germany and the Netherlands were forced to increase interest rates too, despite much lower inflation, unemployment did not cross the 12% threshold. The same for Germany after reunification (unemployment in East Germany however did cross this border and went up to about 20%, despite a decline of the labor force with about 30%). Notice that core Euro countries did relatively well, after 2008.

2. With the exception of Finland the same was true for smaller developed ‘core’ economies (all data: Eurostat, which are slightly different from the data above). For these countries, 10% was an unusual high level.

2

With the exception of Finland after the post-banking-deregulation, ‘kasino-talous’ banking crisis, which coincided with the demise of its most important trade partner, the Soviet-Union, the same holds for small northern European countries (caveat: Eurostat data, which are slightly different from the data above but which clearly do show the same trends). The Finish crisis was, until two years ago, supposed to have been ‘the most severe of any advanced economy since the 1930s’. It was solved by a 40% devaluation. Unemployment reached a maximum of about 17%, started to edge down again after about 3,5 years and crossed the 12% threshold again after 7,5 years. Notice that, until about a year ago, core Euro countries did relatively well compared with non-Euro countries.

3. Some periphery countries however did know higher levels of unemployment. The number of  countries with hyper-unemployment is however on the rise. Even Portugal, which always knew quite low unemployment, is joining the pack.

3

In Spain, unemployment has been rising for almost six years now. It’s more than twice as high as the 12% maximum of the countries shown in graph 1 and 2 and 10% higher than the maximum level in Finland. About the same holds for Greece. Portugal has crossed the Finnish maximum, too and the same probably already holds for Cyprus. And the same held for the Baltic countries. The Finish case used to be extreme – but it isn’t anymore. Notice that these Euro countries did very bad, compared with all other countries (the stabilisation in Ireland is caused by emigration, which is comparable to the development in East Germany).

4. Some Eastern European countries knew hyper-unemployment too, remarkably the countries with the highest unemployment before 2004 were most prone to have high unemployment post 2008, too.

4

A comparable story can be told for the same holds for Eastern European countries (graph 4). Notice the crisis after 2000. Notice that countries with high unemployment around 2002 were prone to have high unemployment again in 12. Did these countries suffer more from deregulation induced international fiat-capital flows which, according to this recent ECB study, can wreck a country and which only lead to non-sustainable demand and temporary work which was only superficially embedded in the economic fabric of the country. Notice that the Euro countries Slovakia and Slovenia do bad, compared with the others (the improvement in Lithuania is however caused by emigration, just like in East Germany).

  1. LeRoy Matthews
    April 15, 2013 at 5:54 pm

    Given the choice between reading a 20-page report “explaining” “social engineering” & a simple report of why it doesn’t work, I’d prefer the report, thank you. DUH!
    Banks have neither an inflation-cutting mandate, nor a general prosperity mandate.
    Cutting unemployment doesn’t automatically produce prosperity. Economics Professor Ludwig von Mises (Austrian Economics) proved some time ago that ideologies like Socialism, Communism, Naziism, Marxism, Collectivism, etc., don’t work, never did work, never will work.
    I’m not sure that I’d agree that Economics is a “Social Science”. Prof. Mises apparently described Economics in terms of Human Activity (Objective), rather than Human Nature (Subjective).

    Study my Letter on Diana@Philosophyinaction.com,
    (Search for : Crazy Inbox 6498)

  2. Helene Clement-Pitiot
    April 16, 2013 at 9:09 am

    Unemployment problem in Europe is largely deeper if you consider the generational components of the unemployment.
    Responsible and realist economists and demographers has to mobilized together and properly measure the point. It is drawing the future of Europe with quite-irreversible aspects.

    Social stability is at stake and events in some peripheral countries have attested ; let’s consider social protest not only in Greece, Italy and Spain however in Bulgaria or Serbia. Contagion is a real prospect.

    European media are trying to divert from the purpose with an intensive strategy : exacerbating indignation on some individual non ethical behaviors. They simply give to the public opinion, “scape goats” one after another to calm to mass spirit. The key goal is to avoid concern on the structural explanations under such non ethical behaviors of the political and business elite.
    Fighting against sovereignty, functionalist institutions of the globalized economy has given functionalist behaviors looking for maximizing private interests. They have emerged as the new oligarchic elite self-legitimized by the media owned by themselves and their cohorts.
    It is not the first moment in world history that this phenomena is spreading : a new round!

    Economists and experts pointing the austerity without alternative are collaborationists to put into question future of the European youth or to exploit it. Maybe both ?
    At some extent, that phenomenon is a proof that Economy is really a social science, economists have underneath social goals or are manipulated in order to promote social and generational segregations.
    Paradoxically, ECB is the major instrument of that social task.

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