Unemployment and stagnation can tear Eurozone apart if austere policies persist

László Andor, Member of the European Commission in charge of Employment, Social Affairs and Inclusion (on the right), gave a press conference to present a new Strategic Framework on Health and Safety at Work 2014 – 2020 and Jonathan Todd, Spokesperson of László Andor. (EC Audiovisual Services, 06/06/2014).

László Andor, Member of the European Commission in charge of Employment, Social Affairs and Inclusion (on the right), gave a press conference to present a new Strategic Framework on Health and Safety at Work 2014 – 2020 and Jonathan Todd, Spokesperson of László Andor. (EC Audiovisual Services, 06/06/2014).

Unrelentingly, Eurostat keeps producing its statistical time series on inflation and unemployment, confirming that the Eurozone economy has entered in a long period of very low price growths and unacceptably high jobless rates. Unquestionably, this is a phase of confirmed stagnation, which may even lead to recession, if the applied policy doesn’t change, as the Italian Prime Minister Matteo Retzi and other EU leaders hope and long for.

Incidentally, on 30 June Eurostat announced its flash estimate for the June inflation at 0.5% unchanged as in May, and this assessment of EU’s statistical service so far has been accurate. The relevant announcement is quoted here: “Euro area annual inflation is expected to be 0.5% in June 2014, stable compared with May, according to a flash estimate from Eurostat, the statistical office of the European Union”.

Disinflation and high unemployment

The next day, on 1 July to be exact, Eurostat published its monthly unemployment statistics for May 2014. The relevant Press release revealed that the overall unemployment rate in Eurozone for last May was again unchanged compared to the previous month. The pertinent passage of goes like this, “The euro area (EA18) seasonally adjusted unemployment rate was 11.6% in May 2014, stable compared with April 2014, but down from 12.0% in May 2013. The EU28 unemployment rate was 10.3% in May 2014, down from 10.4% in April 2014, and from 10.9% in May 2013. These figures are published by Eurostat, the statistical office of the European Union”.

It’s as if time has frozen holding price changes at near zero levels and unemployment rates at socially and politically dangerous heights. Presumably, that’s why both the German central bankers who participate in the Governing Council of the European Central Bank, recently voted for the extraordinary monetary policy measures, despite some Berlin reserves about the futility of excessive liquidity in Eurozone. Last month, Sabine Lautenschläger, Member of the Executive Board of the ECB, and Jens Weidmann, President of Deutsche Bundesbank, didn’t oppose Mario Draghi’s groundbreaking proposal.

Insatiable appetite for liquidity

Along the lines of this unanimous decision of ECB’s Governing council, Eurozone’s central bankers agreed to further cut interest rates and take extraordinary monetary measures in order to support the liquidity of the financial system, and thus help the granting of bank loans to the real economy. Still, the German Federal Minister of Finance Wolfgang Schauble criticized this ECB verdict for unneeded increase of liquidity in the euro area. Obviously, the German government doesn’t share the bankers’ fears and is rather indifferent to the needs of Eurozone’s large banking groups, which have an insatiable appetite for liquidity.

At this point however it must be mentioned that presently the American central bank, the Fed, is sticking to its policy of reverse quantitative easing and will gradually stop supplying practically all the major world banks with zero cost liquidity. As a result, the ECB must have by now started feeling the pressures towards assuming the responsibility to cover the gap, at least partially, that the Fed leaves in the balance sheets of all major global banking groups. In many respects, ECB’s decision to grant extra liquidity to banks is a favour to bankers not to the unemployed youths.

Coming back to Eurostat’s announcements about inflation and unemployment, it seems that the combination of almost zero price changes and sky high jobless rates will continue haunting the European economic horizon for quite some time. For one thing, the monetary measures the ECB took last month to support real economic growth will need many months and probably more than one year to produce a noticeable effect, if any.

What will happen in the between? Will the millions of Europe’s unemployed continue to look for a job or will they, more probably, quit altogether searching for one? The rise of the extremist and the Eurosceptic MEP numbers in the new European Parliament is a clear sign of what may follow in the upcoming national elections. Can the governments in countries like Greece, Spain, Portugal and even France stand the pressures in the social and political fronts? The unprecedented turning of backs by many MEPs at the inaugural plenary session of the European Parliament while the EU anthem was playing, is a sign of the future, if nothing changes in the economy.

All in all, there is no alternative to economic growth. This time the European Parliament withstood the pressures and the mainstream political parties maintain a solid majority. But what about the national elections during the coming months and years? What if Nigel Farage’s UKIP wins a large number of seats in the British House of Commons in 2015 elections? What if the governing coalition in Greece loses the next election whenever it comes? For how long will Matteo Renzi’s star continue to shine in Italy? How safe are Mariano Rajoy’s and Enda Kenny’s governments in Spain and Ireland?

All those questions need answers from the economy. If unemployment and stagnation or, even worse, recession continues for some more years in Europe, then the hideous political and social tendencies may be irreversible. Matteo Renzi’s initiative for a relaxation of the strict austerity imposed by the Stability and Growth Pact rules has to succeed. Otherwise Eurozone won’t be able to meet the needs of all its member states and Italy would consider an exit from Eurozone.

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