Euro Area Unemployment Stays At 10%

There is no economic recovery underway in Europe, which is not much of a surprise to anyone who has watched attempts to restart growth there. The unemployment level in the Euro zone area was 10% in July. Incidentally, inflation rose by 1.6% in the same month. That is hardly inflation really, but it is a bit above the rate in the US.

The explanation for the high level of joblessness is clearly that the economies in may nations in the region are in a period of slow GDP growth or in some cases are shrinking. Unemployment is 20% in Spain, the high water mark in the region.

Economists want to know how quickly the unemployment number will move down to 7% or 8%, which is more manageable by national governments and a sign of an uptick in financial and industrial activity. Experts ask the same about the US.

Europe’s growth problems are not entirely part of the recession cycle. It may be that the austerity programs put in place by several nations have begun to perform badly even as they are in their infancy. Governments had hoped that lower expenses and higher taxes would close large deficits and bring down national debt. For some reason there was hope that these actions would not arrest growth in the private sector. It is difficult to see why anyone would believe that, but governments wanted to nonetheless.

Normally austerity and tax increases should not affect economies until they are fully in place. That is probably not the case in Europe, and may not be the case in Japan, or the US if the Administration and Congress follow other regions into a period of deficit reduction. Companies and individuals have obviously begun to act on expectations of what austerity will bring even before the impact has hit. Enterprises have probably begun to cut staff, or at least stop hiring, because of rising taxes. Consumers are likely to cut back as well.

Governments in Europe have economic models to show their parliaments showing what happens after almost every recession. Consumers normally pile up savings and pay down debts in the lean period which puts them in a position to become consumers again. Expense reduction improves company profits and balance sheets. They then hire as economic activity improves.

Few consumers or businesses are fooled by the talk that austerity does not bring an economic slowdown. That means whatever recovery that might have been afoot in Europe will be trampled.

Douglas A. McIntyre