A new disease is spreading across Europe: hysteresis
By Mehreen Khan | Telegraph – Tue, Oct 27, 2015 01:05 GMT
| An excellent report in The Telegraph | ||
| On the consequences of the dogmatic incompetence of the unelected EU | ||
Startling new labour market figures reveal how the eurozone is struggling to save a lost generation
Europe’s unemployment crisis is the biggest threat to the social fabric of its moribund economies.
For all the talk of a cyclical upturn in the single currency – buoyed by record low oil prices, unprecedented quantitative easing , and low interest rates – joblessness strikes at the heart of the eurozone’s political and economic malaise.
Unemployment in the currency bloc rose slightly in August to 11pc. New (KOSDAQ: 160550.KQ – news) data from statistics body Eurostat now lays bare the extent of Europe’s battle against persistent joblessness.
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Of the eurozone’s near 18 million unemployed in the first quarter of the year, only 18.6pc – or 4.1 million – managed to find work over the subsequent three months. Nearly two thirds – just under 65pc – remained luckless in their attempts to rejoin the labour force.
The numbers are just another glimpse of the chronic problem of long-term joblessness that plague the eurozone.
Defined as being out of work for more than a year, long-term unemployment is a dangerous development that keeps economists awake at night . It (Other OTC: ITGL – news) is rising despite the euro’s recent revival in fortunes. In Europe, around 15pc of unemployed people have not had a job for more than four years.
This gradual loss in valuable skills needed to re-enter the workforce, leads to a phenomenon economists call “hysteresis”. This is when periods of prolonged unemployment can become permanent.
The Eurostat figures show that Greece in particular seems to have succumbed to these sclerotic forces . Only a pitiful 8.6pc of unemployed Greeks managed to find work in the second quarter of the year, compared to three months prior. That’s lower than some of the poorest parts of the non-EMU Europe – Bulgaria, Poland and Macedonia.
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The numbers reflect a particularly tumultuous period in the country’s eurozone future, when crisis talks bought the economy to a halt.
But the longer-term trend is clear. Athens and its environs also hold the ignominious title of the long-term unemployment capital of Europe.
Hysteresis is most likely to take hold in economies stuck in a state of perma-recession. Greece is arguably the best example in the eurozone having suffered a downturn of greater magnitude than the US Great Depression of the 1930s.
= Permanently depressed growth =
Governor of the Bank of England Mark Carney has warned western policymakers to engage in a “race against hysteresis”. Mario Draghi of the European Central Bank has described it as a process where “cyclical unemployment becomes structural”.
But persistent unemployment is not merely a scourge to those shut out of the workforce.
Larry Summers – who has revived the notion of “secular stagnation” in advanced economies – has spoken of hysteresis in the same breath as the long-term decline in potential growth rates across the developed world.
They are two sides of the same coin.
The forces of hysteresis are “a shadow cast forward on economic activity” says Mr Summers. By heightening a natural rate of unemployment, this then has spillover effects which can destroy the future growth of an economy in years to come. It is a self-reinforcing cycle of stagnation and labour force ruin.
Potential growth in the eurozone is now estimated to average just 1pc over the medium term, according to the International Monetary Fund. This “is well below what is needed to reduce unemployment to acceptable levels in many countries,” warns the Fund.
“Because growth prospects are subdued and policy space is limited, the euro area is vulnerable to negative shocks and prolonged low growth, with negative spillovers,” says the IMF.
- Four charts on why the euro isn’t working for Germany or Greece
= Saving a lost generation =
The problem is not new. Similar forces gripped the US during the Great Depression and were seen in Europe during the stagnant 1970s and 1980s.
More than three decades on, they beset the Continent once again. This time round, it has left policymakers scratching their heads. According to European Central Bank’s own calculations, the near 11pc unemployment rate is here to stay. Even (Taiwan OTC: 6436.TWO – news) in an optimistic case, it will only fall to 9pc in 2020 when the eurozone’s economic slack has been used up, according to the IMF.
Both Mr Summers and the IMF have called on eurozone authorities to deploy fiscal tools to fight off hysteresis. But the prospect of mass fiscal expansion is not on the cards in an EMU still fixated on hitting budget targets as the best way to insulate it from a new global crisis.
As for monetary policy, academic economists theorise over raising central bank inflation targets and adding an unemployment mandate to the ECB’s single focus on price stability. Yet such debates are divorced from the political reality of the eurozone, where it took years of institutional wrangling for the ECB to carry out its limited foray into QE.
But Europe’s new hysteresis disease is setting in. The longer it stays, the harder it will be to save another lost generation.