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News : EU Economy Last Updated: Dec 3, 2012 - 6:19 AM


Euro on Respirator: Claims of glimmers of light; Is youth unemployment as bad as it seems?
By Michael Hennigan, Finfacts founder and editor
Nov 30, 2012 - 7:24 AM

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Euro on Respirator: Two reports published this week claim some glimmers of light amidst the gloom in peripheral economies. One report says "fiscal results drive home one fundamental point: austerity is a potent medicine. It has to be applied in the right dose. A lack of the necessary medicine can kill a patient. But so can an overdose." Meanwhile, in September 2012, according to Eurostat, the EU's statistics office, there were 5.5m young persons (under 25) unemployed in the EU27, of whom 3.49m were in the Eurozone. Compared with September 2011, youth unemployment rose by 164,000 in the EU27 and by 275,000 in the Eurozone. In September 2012, the youth unemployment rate was 22.8% in the EU27 and 23.3% in the Eurozone, compared with 21.7% and 21.0% respectively in September 2011. In September 2012 the lowest rates were observed in Germany (8.0%), the Netherlands (9.7%) and Austria (9.9%), and the highest in Greece (55.6% in July 2012) and Spain (54.2%). However, while the situation in both Greece and Spain is very bad, the statistics makes the reality look even worse. Spain's more realistic rate is in the low 20s and Greece's is about 15%.

Excluding construction, Ireland had no real growth in the past decade; Italy only managed 3% in 2001/2010 - - 0.3% per year; US 16% (worst since 1945); UK 15%; France 12%; Germany and Japan 8%. Japan had a per capita annual GDP of 1.6%; US 0.7%; France 0.6% and Germany 0.8%.

For most of the decade, there was a huge international credit boom.

As for Spain, the unemployment rate was at a record 24.5% in 1994; 21% in 1997 and in some regions such as Andalucía, it was above 30%. The rate fell to 8% in early 2007 and is now over 25%. Italy's unemployment rate was higher in 1996 than it is now.

Several countries have had structural problems that pre-date the launch of the euro in 1999.

Marco Annunziata, chief economist, General Electric Co., in an article in VoxEU, last May on the wasted lives of today's youth said: "Youth unemployment is one of Europe’s most glaring problems. Opponents of austerity point to the swelling ranks of unemployed young (15-25 years of age) people in Europe’s periphery as proof that fiscal tightening can no longer be tolerated.

The seriousness of the problem cannot be underestimated, and the speed at which young people have been thrown out of the labour market is frightening. But equally frightening is how long Europe has lived with high youth unemployment. Sadly, in several countries the rise in youth unemployment looks largely like a reversion to the mean after unsustainable credit growth spurred a bubble in fixed-term jobs.

Implausible as it sounds, Italian voters have put up with an average youth unemployment rate of 30% for the last 40 years; Spanish voters with a rate of 32%. Italy experienced “strong” economic growth during 1994-2000, with GDP rising at an annual average of 2%. During this boom period, the youth unemployment rate still averaged 33%. In other words, one young person in three was unemployed when the economy was at its strongest. The rate never dropped below 20%.

Spain’s economy grew at an average of 3.6% between 1995 and 2007. During this impressive run, the youth unemployment rate averaged 28%; it was below 20% for just three years, with a 'best performance' of 18% in 2006."

Brendan Walsh, former professor of economics at University College Dublin (UCD), wrote last June about the issue of measuring youth unemployment.

"As Stephen  (sic) Hill pointed out in a piece in the Financial Times on June 24th, the unemployment rate may not be the best measure of labour market conditions among young people who have opportunities to stay in the educational and training systems rather than entering a depressed labour market.  For this reason, an alternative measure, the unemployment ratio, has gained currency.

The conventional unemployment rate is  the numbers ‘unemployed’ as a proportion of the ‘labour force’.  The ‘labour force’ is the sum of the employed and unemployed.  The ‘unemployed’ are those actively seeking work, but not at work. (For young people it is of interest to break unemployment down into those ‘looking for first regular job’ and those who are ‘unemployed having lost or given up previous job’.)

The problem with using the  unemployment rate to measure labour market conditions among young people is that the denominator does not include those who are in the educational system or on full-time training courses.  During a recession, the higher the proportion of a youth cohort that stays on in school or college or in training, the smaller the labour force and the higher the unemployment rate. This is perverse."

"If the Eurozone gets through the current acute crisis and stays on the reform path, it could eventually emerge from the crisis as the most dynamic of the major Western economies," Holger Schmieding, chief economist at Berenberg Bank and author of the '2012 Euro Plus Monitor,' said on Monday this week.

In the absence of major policy mistakes, the euro crisis could gradually fade in 2013, the report noted, as long as the region avoids overdosing on austerity like Greece. Rather, policy focus should shift urgently to pro-growth structural reforms.

However, Giada Gianni, European economist at Citigroup, told CNBC that while Europe had made some progress in its public sector finances since 2009, the impact of major restructuring and reform has yet to be seen. “Bits and pieces have been put in place, but we still haven’t seen the impact of reforms on budgets as yet,” Gianni told CNBC. “Definitely, the public sector finances have improved compared to 2009 or even 2010, and current account balances have shrunk significantly … but this is also because countries are importing less and consuming less,” she said.

The report by the Brussels-based Lisbon Council and Berenberg concluded that the economic crisis that had forced countries such as Greece, Ireland, Spain, and Portugal to reform their fiscal systems and as a result all four countries had strengthened “their adjustment efforts over the last 12 months.”

Using four criteria to review how the Eurozone’s economies were responding to the economic crisis, the report ranks key aspects of adjustment such as change in the fiscal position, external economic accounts, unit labour costs, and supply-side reforms as a basis for analysis and the results were aggregated to indicate the speed of progress made in each European country.

“Almost all countries in need of adjustment ... are slashing their underlying fiscal deficits and improving their external competitiveness at an impressive speed,” Schmieding said, adding that “the Eurozone is turning into a much more balanced and potentially more dynamic economy.”

“In other words” he added, “under the pressure of crisis, the countries that need to shape up fast are doing so” and that financial aid for countries such as Greece hadn’t led to a general malaise in enacting reforms. “The results reveal no trace of a ‘moral hazard,’ that is of a hypothetical risk that outside support could blunt the readiness to adjust,” Schmieding said.

Irish data which is distorted by the dominant foreign-owned sector, is invariably misread by international observers. Why wouldn't it apply to other countries?

The Allianz Euro Monitor, (pdf link to report at bottom of linked page) based on 14 indicators, measures macroeconomic imbalances in the Eurozone. The results for 2012 show above all an encouraging picture for the peripheral countries. Prof. Dr. Michael Heise, chief economist of Allianz SE, said on the results of this year’s report: “Apart from Belgium, Greece, Spain and Portugal are the only Eurozone countries to record an improvement in their overall score compared with last year. The results show: reforms take time, but the ‘problem countries’ are on the right path. We therefore expect the economy to stabilize gradually next year.”

The German insurance giant notes the: "genuine progress is being made towards restoring the health of the Eurozone economy. The only countries that managed to improve their overall score were Belgium (5.9), Spain (5.0), Portugal (4.1) and Greece (3.4). From a low level, Greece in fact managed to record the largest improvement of any Eurozone country, helped for instance by a drop in unit labor costs. Private sector debt levels also improved."

German immigration

Destatis, the German federal statistics office, reported this month that just over half a million people arrived in Germany from abroad from January to June of this year. That was some 66,000 more than came in the first half of 2011, an increase of 15% and marked the continuation of a trend. Last year, immigration was up 20% over 2010.

The steepest rises in the first half of this year have come from Eurozone countries. More than 15,700 people arrived from Greece in the first six months of 2012, a 78% increase over the first half of 2011. The 11,000 people who arrived from Spain mark a jump of 53% over the previous year. The influx from non-Eurozone country Hungary rose by 46%, mainly due to tough economic conditions there.

Numerically, however, Poland remains on top of the list of origin countries. Some 89,000 people arrived from Germany's neighbour in the first half of the year.

Deutsche Welle says that just six German soccer players would have fought in the 2010 World Cup's semi final against Italy without the support of the team's players with immigrant backgrounds: Sami Khedira (Tunisia), Mesut Ozil (Turkey), Jerome Boateng (Ghana), Lukas Podolksi (Poland) and Mario Gomez (Spain) all were born abroad, or were born to immigrant parents living in Germany. Thanks to their German passports, they are allowed to play for the German national team. The importance of immigrants for German society cannot be stressed enough.

7.1m people live in Germany without a German passport. Then there are those 8.6m Germans with a so-called migration background, according to the German Federal Employment Agency's job market analysis in June 2012. In total, 15.7m people with an immigrant history live in Germany - or some 19% of Germany's overall population.

Journalist Pitt von Bebenburg and his colleague Matthias Thieme examined the importance of immigration for Germany by looking into a scenario without them. Their book 'Germany without foreigners' deals with the question what would happen if all those migrants without a German passport - -  about 7m - - would need to leave Germany overnight?

Deutsche Welle asks is the history of immigration to Germany   big story of success? Not everyone thinks so. According to a study by Bielefeld University, 47% of Germans have a critical attitude toward immigrants.

Von Bebenburg and Thieme try to tackle prejudices with facts. "We are in a transition where tensions and conflicts still exist, but I believe it will soon be a matter of course to have a migration background," said von Bebenburg. Because an immigrant-friendly culture does already exist in Germany, he adds.

Just like it does in the world of sports - - and what might help Germany's multicultural national soccer team secure the next international victory soon.

Finfacts Premium reports:

Global youth unemployment to worsen; Is Spain's rate really over 50%? Highest ratio in Sweden

European countries with strong apprenticeship systems and/or flexible labour markets have lowest youth unemployment

Austerity and youth unemployment in Europe

Unemployment in Spain is at a generational high of 25% hit by the financial and sovereign debt crises. Luis Garicano, professor of economics and strategy at the London School of Economics discusses with FT leader writer Ferdinando Giugliano what the government should do to reduce unemployment in Spain:

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