Europe must act now to stop the slide into a new recession. As I explain in this article, there is a lot that lawmakers can do, both at the EU level and in the member states. However, they cannot wait—they must get to work now.
On September 27th, I warned that
The twin villains of high inflation and high unemployment have not left Europe. They are just taking a nap under a pile of moderately optimistic economic data.
Since I issued that warning, Eurostat has released a whole month’s worth of unemployment numbers. They have also started releasing inflation figures for September. Based on those numbers, I reiterate my warning: Europe is not out of the stagflation woodwork.
The main problem for the European Union and its member states is that unemployment is stubbornly unwilling to come down, while inflation in most cases remains far too high. Worse still: the European economy is showing symptoms of having hit a capacity ceiling—run out of productive resources—while unemployment is still at recession levels.
The August unemployment numbers, which were announced by Eurostat on October 2nd, show that when we remove seasonal adjustments and look at the raw data, a surprising 19 EU member states have made no progress at all on reducing unemployment since May. Nine countries have at least the same unemployment rate as they had back in January.
This means that the economies of more than two thirds of the members of the European Union are effectively in a recession; the final verdict comes when we see their GDP numbers for the third quarter. However, Germany and France, the two largest economies of the EU as well as the euro zone, are in the group with rising unemployment. This makes it easy to predict an economically tough winter for all of Europe.
Tables 1a and 1b report the percent of total unemployment for the 27 EU states, for January (1a) or May (1b) and for August. The last column reports the difference, with increases or unchanged unemployment rates highlighted in red.
Table 1a shows that nine countries had a higher unemployment rate in August than in January; Czechia had the same rate:
Table 1a
Looking only at Table 1a, it is easy to draw the conclusion that most of Europe is still doing relatively well. After all, since the start of the year, most countries in the EU have lowered their unemployment rates. Indeed, the union as a whole has gone from 6.3% in January to 5.9% in August, while the jobless rate in the euro zone has fallen from 6.9% to 6.4%.
Unfortunately, this positive picture changes when we isolate the most recent numbers. Most of the decline in unemployment happened in the first few months of the year; not much has happened since May. On the contrary, 19 countries now have a rising jobless rate:
Table 1b
Of the eight EU member states where unemployment has fallen since May, only Finland experienced a significant decline. For both the EU as a whole and the euro zone, the unemployment rate rose by 0.1 percentage points from May to August.
In fairness, the rise in unemployment is generally modest. Nevertheless, the very fact that it is increasing, and doing so in a large variety of countries, is an unmistakable and troubling sign of weakness in the European economy. If unemployment was increasing only in countries where it was already high, we could conclude that there were particular circumstances in those economies that led to rising joblessness. However, as Table 1b shows, unemployment has gone up in Germany from 2.8% to 3.2% and in Czechia from 2.3% to 2.6%, as well as in France from 7% to 7.8% and in Croatia from 6.2% to 6.7%.
In other words, unemployment is coming back in countries large and small, in both strong and weak economies. This means that the question to ask is not why unemployment is rising in any particular country, but why it is still falling in other countries.
To answer that question, we need more macroeconomic data than Eurostat currently offers. When they publish national accounts—which essentially means GDP and its components—for the third quarter of this year, we will get a comprehensive picture of why, e.g., Spanish unemployment ticked down by one-tenth of one percent from May to August. We can also get details on why the Finnish economy currently exhibits the strongest trend in the labor market.
While we wait for Eurostat to produce the national accounts numbers for Q3, we can glean some information from the trends in youth unemployment. This age segment, which covers all workers less than 25 years old, is usually more volatile in terms of employment than the rest of the labor market. It is also a good trend indicator: by necessity, younger workers have less seniority than their older colleagues and therefore are more prone to be laid off early in the business cycle downturn.
Interestingly, an examination of youth unemployment makes the picture of the labor market more complex. So far, Eurostat has only published numbers on youth unemployment from 22 of the 27 EU states, but as Table 2a shows, they are split almost evenly. While the jobless rate is higher in 12 countries, it is lower in 10:
Table 2a
Once again, France and Germany are in the same category, which could suggest an EU-wide trend of rising youth unemployment. However, with Italy and Spain in the opposite camp, both having seen large decreases in youth joblessness, the trend exhibited by the labor market as a whole (per Tables 1a and 1b) is not quite as clear.
Estonia takes the not-very-honorable top spot with an increase in its youth unemployment by 6.5 percentage points. Their experience over the course of this year is telling of an economy going in the wrong direction:
- The youth unemployment rate falls from January’s 16.4% to 11.6% in February;
- From there, it slowly creeps upward again, reaching 16.4% again in May, then 19% in June and 22.9% in July and August.
It is no surprise that Estonia leads the pack in the May-to-August category as well:
Table 2b
With 14 countries in the ‘red zone’ and 10 in the other, there is still no obvious trend in unemployment for the young. However, if we compare the trends in total unemployment with those in the youth segment, we get quite an interesting picture. Of the 14 countries in Table 2b that had rising youth unemployment, 13 also have rising unemployment for the entire labor market. As Table 3 shows, in all of them, the youth rate is rising faster:
Table 3
In six countries, the two unemployment categories are synchronized in the opposite direction. Here, the decline in joblessness is faster for young workers than for the entire labor market.
These numbers confirm that young workers have a less certain attachment to the workforce than older workers. They also tell us that the trends in youth unemployment are good pointers about where the economy as a whole is heading. Finland is an excellent example: not only has this Nordic country seen the largest decline in total unemployment, but its jobless rate among workers younger than 25 is by far the strongest in Europe (keeping in mind, of course, that five countries have yet to report their August numbers).
At the other end, Estonia verifies the same relationship: this Baltic state has the fastest rising rate in both categories.
When examined together, the two columns in Figure 3 paint a clearer version of the same picture that we saw in Table 1b: the dominant trend in the European economy is one of rising unemployment. This means that the economy as a whole is weakening—just as I have predicted that it would—and that Europe’s policymakers must roll up their sleeves and get to work.
With that said, all is not lost for the European economy. While the labor market is going in the wrong direction, inflation keeps coming down. Currently, Eurostat has released September inflation numbers for 18 EU states, and only five of them recorded a higher year-to-year inflation rate compared to August:
- Slovakia leads with 8.9% inflation, down from 9.6% in August;
- Croatia has the second-highest inflation rate at 7.35%, down from 8.4% in August;
- Slovenia comes third at 7.1%, up from 6.1% in August;
- Austria is fourth at 5.8%, down from 7.5% in August; and
- Italy takes fifth place at 5.7%, an increase from 5.5% in August.
There are no dramatic upticks in inflation, but the Spaniards have reasons to worry. In June, their inflation bottomed out at 1.6%. In July, it had ticked up to 2.1%, followed by 2.4% in August. In September, their inflation rate was just above 3.2%.
Spain is an interesting case. A doubled inflation rate over the course of three months may not look worrisome when we are talking about these low figures, but when this trend is paired with unemployment rates as high as 11.4% in total and 26.6% for the young, there is cause for concern. Even if their jobless rates are trending downward (in a gentle canter), with so many idling workers, there is absolutely no reason for inflation to rise as it currently does.
As I pointed out last week, an economy that exhibits these two trends at the same time is an economy with a problematically low capacity ceiling. Bluntly: the economy runs out of capital and labor long before there is an actual shortage, in this case of labor. This is definitely a problem for the Spanish economy, but they are not alone. At 5.95%, the EU as a whole still has a high inflation rate.
The rate is 5.2% for the euro zone, which is paired with a somewhat higher unemployment rate of 6.4%, compared to 5.9% for the EU as a whole. In addition, the downward trend in inflation is a sluggish one, and it couples with basically stalled unemployment. In the euro zone,
- In May, unemployment was 6.3% and inflation was 6.1%;
- In June, unemployment was 6.2% and inflation was 5.5%;
- In July, unemployment was 6.3% and inflation was 5.3%; and
- In August, unemployment was 6.4% and inflation was 5.2%.
These numbers point to an economy that has reached the height of its capacity and is heading into a new recession. This is happening while inflation remains considerably above what the European Central Bank has set as its long-term target rate.
I have only one recommendation to make to Europe’s legislators: act now! You cannot afford a recession, especially not now with inflation this high. You can do a lot:
- Deregulate, remove red tape, and cut costs for entrepreneurs who have to interact with government agencies; make life easier and cheaper for those who create jobs in Europe;
- Cut taxes that help low- and middle-income families, especially taxes that cut their cost of living; to begin with, check out the debate over taxes that the British Tories have started;
- Freeze the transition into a ‘green’ economy; bring to a halt the march toward more expensive and less predictable energy; and
- Draw up plans for structural spending reforms; take this opportunity to redesign your welfare states so they no longer operate based on the principles of economic redistribution; turn them into the true last-resort safety nets they were originally meant to be.
With these reforms, Europe’s lawmakers, whether at the EU level or in the member states, can achieve a lot within a short period of time. The payoff will be substantial, and long-term in nature.
