It is very hard to be optimistic about the eurozone economy, particularly so when we get data such as the unemployment figures out yesterday. These showed that eurozone unemployment has risen to 10.9 per cent, a level only matched in April 1997 before the creation of the euro.
Click HERE to view graphic
There actually are a couple of small glimmers of hope, of which more in a moment, but these figures are dreadful and give a disturbing backcloth to the elections this weekend in France and Greece. How much more misery can you heap on to people?
Looking at the numbers, two things stand out. One is the huge divergence across the region. The other is that, even in the good times, unemployment was still a problem. The top graph shows the divergence. The most alarming figure of course is that of Spain, where nearly a quarter of the workforce is unemployed, a number that is likely to climb further as the economy is still shrinking. There are some reasons for these very high levels, in particular the collapse of the construction sector (building employs a lot of people) but also the size of the informal economy, where some of the unemployed are able to earn something.
But the figures for Portugal are worrying too because the country had relatively low unemployment a decade ago, suggesting that euro membership has worked to its disadvantage, making the country less competitive. Portugal, of course, is one of the three countries to be rescued by the eurozone authorities, whereas Spain has not yet met that fate. But the flow of news and opinion in recent weeks suggests that such an outcome is pretty much inevitable. Several banks will have to be rescued and the question is who will do that.
At any rate the divergence across the region, from Spain's 24.1 per cent to Germany's 5.6 per cent (6.8 per cent on the national calculation) is utterly different from the divergence in the UK, which ranges from 11.2 per cent in the North-east to 6.3 per cent in the South-east. Worse still, the divergence is increasing. What Germany has achieved is a remarkable contrast to the fringe of Europe.
The other thing that stands out is the high unemployment generally. The second graph shows the longer-term pattern and the NAIRU, a clumsy acronym that stands for the Non-Accelerating Inflation Rate of Unemployment. That is the lowest unemployment rate an economy can accommodate without causing inflation, in shorthand the natural rate of unemployment. It seems to have been between 8 per cent and 9 per cent for most of the past 20 years, a level that represents a huge wastage of human skill and energy. We have managed to devise a system in Europe that condemns nearly a tenth of the potential workforce to living off welfare. In view of the pressure on public finances from an ageing population as well as supporting these jobless people, it cannot make sense to continue in this way.
But to change things means labour market reforms, such as the UK pushed through in the 1980s and Germany in the early 2000s, are now being urged on Spain, Greece, Italy and elsewhere. However, in the short-term labour market reform tends to increase unemployment. As you can see, German unemployment in the middle of the last decade was higher than in France, Spain and Italy and that was in a growth period. It is much more painful to try to adjust in a slump, hence the debate in Europe as to whether the necessary structural reforms can sustain political support.
So it is all bad news. But if you want to see a glimpse of light in what is happening in Europe, it is worth noting that unemployment is a lagging indicator, in that it reflects what has been happening to the economy rather than what is likely to happen. The forward-looking indicators, while not great, are somewhat more cheering. I have been looking at two.
One is European money supply. The European Central Bank has pumped in a huge amount of liquidity into the banking system. Most of that seems to have ended up in European sovereign debt, with the banks borrowing at 1 per cent and buying their own country's bonds yielding 5 per cent or more.
But some has leaked into the commercial economy. Simon Ward at Henderson comments: "Eurozone monetary trends are improving at the margin, suggesting that the ECB's rate cuts and liquidity injections have been at least partially effective... A recovery, moreover, has occurred in the periphery as well as the core in the last two months, a development that – if sustained – could herald an end to recessions in the former group by late 2012."
If he is right that would be rather contrary to the current mood of despair. Some support for the "Europe is growing again" school comes from some work by Goldman Sachs developing what it calls the Current Activity Indicator. The idea is to look at all the data and devise something that tells you what is happening in a more timely and more accurate way than the official GDP figures.
Well the new calculations for the eurozone suggest that growth was "marginally positive" in the first three months of this year. Goldman thinks that the official figures for GDP, out on 15 May, will probably show a decline, the difference being that the Goldman estimates include the purchasing manager surveys whereas GDP figures do not. But we will see. The main point here is that while the European economy is struggling and parts are in dire trouble, the overall picture is not one of unutterable gloom. Goldman thinks the eurozone, taken as a whole, will show some growth this year. But even if the eurozone economy does stabilise, it will be many months before any real progress will be made getting the jobless back to work.