Europe’s Scariest Chart Goes Parabolic
Ireland has seen its youth unemployment rate drop for 10 of the last 11 months and has dropped to a ‘mere’ 26.6% – the lowest since July 2010 – in what is truly the only possible silver lining in today’s absolutely dreadful data release. All four of the other PIIGS nations now have broken the dismal Maginot Line of 40% youth unemployment with Italy finally joining the club (Italy 40.5%, Portugal 42.5%, Spain 58.2%, and Greece 62.5%). What is even more concerning is that not only are these rates extremely high but they are accelerating with all four of these dark nations seeing their rates rising faster than in recent months (this was the 2nd fastest rise in Greek youth unemployment ever). Overall, Europe’s youth unemployment rate continues to march higher (to 24.4%) having not fallen for 24 months, but it is Spain that is the ‘winner’ with 41 consecutive months without a drop in youth unemployment. With welfare benefits running dry, and Sweden and Switzerland already running hot, we fear this summer may bring the much-feared unrest so many have been concerned about.
In other news, Germany‘s youth unemployment rate pushes on lower – now at 20 year lows…
On Austerity, Unrest, And Quantifying Chaos
Politically speaking, austerity is a challenge. While we would expect that governments imposing spending cuts on their voting public may face electability issues, in fact, a recent paper from the Center for Economic Policy Research finds that there is no empirical evidence to confirm this – i.e. a budget-cutting government is no less likely to be re-relected than a spend-heavy government. However, what the CEPR paper does find as a factor in delaying austerity is much more worrisome – a fear of instability and unrest. The authors found a very clear relationship between CHAOS (their variable name for demonstrations, riots, strikes and worse) and expenditure cuts. As JPMorgan notes, austerity sounds straightforward as a policy, until the consequences bite. It remains unclear that the road Europe is taking is less costly in the long run, in economic, political and social terms. The history of Europe over the last 100 years shows that austerity can have severe consequences and outcomes and perhaps most notably, the independent variable that did result in more unrest: higher levels of government debt in the first place.
The passage through time of the author’s CHAOS factor shows that since 1994 we have had relative stability but given the ongoing austerity that is being forced (rightfully) upon the most indebted nations in Europe, it is perhaps no longer an issue of electability as technocrats roam freely and much more one of central stability and fear of the empirical link between austerity and anarchy.
The authors tested to see if results varied with ethnic fragmentation, inflation, penetration of mass media and the quality of government institutions; they did not. Results are also consistent across time, covering interwar and postwar periods.
The independent variable that did result in more unrest: higher levels of government debt in the first place.
Compounding the problem is the way some decisions are being taken, which may reinforce perceptions of a “democratic deficit” at the EU level, an issue highlighted by Germany’s Constitutional Court. It remains to be seen if Europe can sustain cohesion around its path of most resistance. One sign of rising tensions: the following (staggering) comment by the head of the Bank of France: “A downgrade does not appear to me to be justified when considering economic fundamentals,” Noyer said. “Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping.” At a time of increasing budgetary pressures and declining growth, I suppose there are limits to European solidarity.
The full paper can be found below: