Thursday, August 15, 2013

Annals of Austerity FAIL, Eurozone Redux

July 31 saw the latest release of European Union unemployment numbers, and Monday's gross domestic product figures brought no joy, especially for Greece. As Think Progress reports, Greek unemployment hit a new record of 27.6 % in May, while Spain's June unemployment figure was 26.3%, according to Eurostat. As the world's biggest experiment in austerity, the European Union continues to prove a failure. Below is the Eurostat figure for unemployment in member states for June, including new (as of July 1) member Croatia, designated HR (click for larger image).

Source: Eurostat

As reported at first at Reuters, Greece's gross domestic product has fallen by 23% since January 2008. Anyway you slice it, that's a depression, not a recession. Despite austerity, the Greek economy has gotten sicker and sicker.

But, wait! you say. What about Ireland? Its unemployment rate has dropped an estimated 1.5 percentage points from its January 2012 peak of 15.1% to just 13.6% in June 2013. Isn't austerity finally paying off there?

If only that were so. What actually is happening is that Ireland has returned to its historical solution of substantial out-migration to reduce the number of unemployed workers that show up in the official data. And yes, the numbers are way more than enough to wipe out the apparent 1.5 point drop.

According to the Central Statistics Office Ireland (Table 5), emigration has surged from 72,000 in 2009, the last year of net in-migration, to 87,100 in 2012, when net out-migration was 34,400. If you look at net emigration of those 15-64, the closest we can get with the data to prime working age, the situation is even somewhat worse. Over 2010-2012, net out-migration in that age group has totaled 90,700.

I calculate the potential effect on the unemployment rate as follows. Ireland only compiles official unemployment data quarterly, and makes monthly estimates in between. So the last official unemployment rate was 13.7% for the first quarter of this year. According to the CSO, there were 292,000 unemployed then. Dividing by 0.137, we get a labor force of 2,131,387, subject to rounding error. Now add 90,700 to both numerator and denominator, and the maximum potential unemployment rate, if all of those people were in the labor force and unemployed, is 382,700/2,222,087 or 17.2%.

Now, certainly some of the 15-24 year olds would not be in the labor force, though many will. Even if we restrict ourselves to the 25-44 age group, net out-migration for 2010-2012 comes to 36,000, which would bring the unemployment rate back to 15.1%, equal to the worst month since the recession began.

We can see, then, that austerity is sinking all boats. Greece has passed Spain in unemployment and is producing barely 3/4 what it did in 2008. Ireland's reduction in unemployment is a mirage based on emigration. The same is true in Latvia and Lithuania, by the way, which the Irish Times reports have lost 7.6% and 10.1% of their population between 2007 and 2012. As the paper notes, "If Spain and Italy had lost the same proportion, it would have been 11 million."

Yet the drumbeat for austerity continues. The sequester goes on. And millions suffer needlessly.

Cross-posted at Angry Bear as "Austerity Sinks All Boats."


  1. With the twin deficits above 15% of GDP each in 2009, the borrowed time of the Greek economy had long been exhausted. The non-option of default led to the two bailouts (110+130 bln), and also a haircut and buy-back of debt that reduced it by some 120 bln.

    Austerity was not meant to be of the Alesina-Ardagna variety: it was rather what Edward Hugh defined:

    What happened .... was not a case of long established living standards being suddenly slashed, it was a case of them being cut back to where they were before they were raised in an unsustainable way in order to win elections.

  2. Got here (as many others will) via Paul Krugman. Things are indeed still bad here in Ireland, but I don't think anyone seriously expects continued austerity to do anything other than dampen domestic demand and thus for employment to remain high or grow until international demand picks up.

    Nevertheless, in the absence of a backstop for expansionary borrowing or of a co-ordinated EU-wide stimulus, the Government here has little option but to continue to cut yet more spending this year and next year, lest the markets or the EU/IMF punish us with higher interest rates.

    Or do you feel that the Irish Government in isolation should abandon austerity and risk increasing its borrowing with the associated risk of increased interest rates on Govt debt?

    1. No, I don't think the Irish government can abandon austerity in isolation. The main culprits now are Germany and the ECB.

      Only if Ireland left the euro would it have a chance for policy autonomy, and certainly that would have its own set of problems. I don't know enough about what could make that feasible to make any firm recommendation on the euro.

    2. Then there is no hope. If economists based in Ireland cannot make any firm recommendations on austerity or the euro, then Ireland is doomed to one or two lost decades and a destroyed youth for at least one generation.

      Ireland needs to team up with the other victim countries and take control over the ECB and the EU.

      As long as all three policy levers are contractive, the economy will not regain escape velocity.

      1. Contractive fiscal policy - Austerity
      2. Contractive monetary policy - Too high interest rates, no QE, no credible Lender of Last Resort.
      3. Contractive regulatory policy - Basel 3 leading to Banks unwilling to lend at the time when we need the banks to support the economy.

      As long as even the PhD economists in the victim countries doesn't fight against this stupidity as much as they can, there is no hope that the uneducated masses or the politicians will get it.

  3. SJ, Let me see... a country must choose between:

    "increasing its borrowing with the associated risk of increased interest rates on Gov't debt," on the one hand.
    And, on the other hand, the abandonment of the nation by the people themselves via emigration – the ultimate dismissal of the government ostensibly elected to govern them.

    Hmm, lemme see...

  4. In an open economy like Ireland the stimulative effect would be lessened if they go at it alone. The benefits bleed over to trading partners, with little "bleed-back" if those countries don't stimulate too. The obvious solution of course is for the Irish government to ask other EU nations to join in the stimulus effort. And that's really what's missing, I hear precious few top politicians in any country talk about stimulating their own national economies, and as far as I know none is pushing for it on EU-levels. Yet the more countries join in, the greater the impact.

  5. Thanks Kenneth and others - In fairness the Irish Govt has been pushing the stimulus agenda as hard as it can. Joan Burton our Minister for Social Protection has been particularly vocal on this. The Irish presidency of the EU saw as much push for expansionary policy (couched in terms of 'job creation') as is realistic in a German election year.
    Here is an article Joan Burton co-authored with some EU colleagues:

    As for leaving the Euro, many economists here were vocally in favour of it for a time - it was probably the right option to take, but it may no longer be... it may never have been politically feasible, but now I think most feel that we're better served by being able to facilitate US trade with the EU by being Eurozone members, given that we've come so far along the road of reducing the primary deficit.

    As for taking control of the ECB - its agenda is dominated by its explicit mandate to keep inflation low - I think that is a deep-rooted German fear. Progress on this may occur after the German elections and we'll see if it makes good on the commitment to backstop bonds on the secondary market.

    I will say that Ireland has a vibrant academic economic debate - Stephen Kinsella and Constantin Gurdgiev are too good examples (from different sides of the debate).

  6. The problem with your analysis is that there is no control to compare.

    Were there countries that, prior to these austerity measure taken by Greece, Ireland, Spain, etc., that were in comparable debt but, rather than implementing austerity measures, continued to just accumulate debt until they went bankrupt?

    How are those bankrupt countries doing now?

    Austerity may be bad, but are the alternatives worse? The decision by the governments of those countries was that the alternatives were worse. Why do you think they are all wrong?

  7. As someone living in Ireland, that pretty much sums it up. Austerity is destroying the economy and we're been stagnating for the last 5 years. I'm graduating this week and most of my friends are looking abroad.