France, Germany on the Downslope

Recently I have reported how Europe’s troubles continue, now in the form of deflation and rising poverty. But unemployment is still a major issue; recent signs of plateauing or even a minor decline in joblessness are indicators of stagnation rather than a recovery under way.

Today I can report yet more evidence that Europe’s crisis is continuing. From Euractiv:

One of French President François Hollande’s ambitions is to put in place social and fiscal convergence between his country and Germany, but for now the two economies are taking opposite turns. The number of unemployed people looking for a job has increased by 0.3% in France, which marks the president’s failure to decrease unemployment by the end of 2013. According to official figures published by the Labour Ministry this week, people without any activity (known as category A) have reached a record high number of over 3 million. Categories B and C (persons who have a slower activity) has increased by 0.5 to reach 4,898,100 in continental France and over 5 million including the overseas territories.

It is difficult to give “slower activity” a statistically meaningful definition. However, there are some ways to measure it, and as Eurostat has shown there is a widespread problem in Europe with people not getting full-time jobs. Part of the reason, especially in the French case, is the incredible rigidity of their hire-and-fire laws. But on top of that there is also the problem with unending austerity – aimed at saving the welfare state when tax revenues decline – which depresses overall economic activity. So long as European austerity continues there can be no recovery in private-sector activity. As a result, the French government will fail miserably in its attempts to put the economy back on a growth track again. This failure includes the so called “responsibility pact” that the socialist government came up with last year. Euractiv again:

These figures were published on the day when Prime Minister Jean Marc Ayrault was meeting with employers’ and trade unions’ organisations to launch the “responsibility pact” announced by the president and which looks to reduce employers’ contributions in exchange for commitments for more job creation.

Long story short, the French government is doing practically everything wrong. That includes trying to take advice from its German neighbor. Back to Euractiv (and a poorly written part of the article):

The situation is Germany is radically different. At the beginning of January, Germany unveiled that after four months of rising unemployment, figures fell by 15,000 to 2965 million [sic!] in December in seasonally adjusted (SA) data, according to the Federal Labour Office. The unemployment rate remained stable at 0.9%, [sic!] close to its lowest level since 1990, after a peak in 2011. In absolute numbers the job seekers, however, increased by 2.87 million against 2.80 million in November and the unemployment rate reached 6.7% against 6.5%.

Obviously, Germany does not have 2,965 million unemployed – the article meant to say 2.965 million. Also, the German unemployment rate is not 0.9 percent… The latest monthly Eurostat figure, from November 2013, is a seasonally adjusted 5.2 percent. This is still low, and less than half of the EU average. But the trend is no longer downward, and there is a good reason for that. Consider the following national accounts numbers for the German economy, reported in fixed prices:

2007 2008 2009 2010 2011 2012 2013
Gross exports 8.0% 2.8% -13.0% 15.2% 8.0% 3.2% 0.6%
Private consumption -0.2% 0.8% 0.2% 1.0% 2.3% 0.8% 0.9%
GDP 3.3% 1.1% -5.1% 4.0% 3.3% 0.7% 0.4%

The Gross exports numbers explain why the German economy has been so good at producing jobs recently. But as the number for 2013 shows, that boom is tapering off. In order to keep growing, the German economy would need the domestic, private sector to take over. The only way this could happen is if private consumption went into high gear, obviously has not happened. Over the seven years reported here, German private consumption has exceeded two percent growth in one year only, namely the second year of the fabulous export boom of 2010-11. With consumption growing at less than one percent, and the export boom coming to an end, it is safe to say that the German economy will not continue to push down its unemployment rate. Not surprisingly, GDP growth is now below one percent for the second year in a row, with a declining trend.

These numbers from Germany verify that the European economy completely lacks ability to grow on its own. The reason, again, is the depressing campaign to save fiscally doomed welfare states in the midst of a recession. If Europe’s political leaders had the courage – as well as moral conviction and economic insight – to let go of the delusion of a big, redistributive government, then Europe would quickly rise to once again become an engine in the global economy.

Until that happens, Europe’s fate is the same as that of other formerly great industrial nations, such as Argentina. However, because of the extreme rigidity of European politics I fear that the economic wasteland opening up in Europe will have consequences that reach even farther than the decline and fall of one of Latin America’s economic powers.

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