Post-war unemployment and the failure of neo-classical social engineering in the Eurozone

with 4 graphs – Published on Real-World Economics Review RWER Blog, by mrijnknibbe, April 15, 2013.

Eurozone unemployment is, with 12%, at a historical maximum. This average masks lower levels in the core while levels in the ‘periphery’ are beyond anything ever experienced in the developed economies, post WW II (see the graphs). This is a concern for the European Central Bank (ECB). This bank has next to its inflation fighting mandate a clear, legal, and binding prosperity mandate.  

The (neo-classical) idea was that just taking care of low and stable inflation was enough to guarantee low inflation as well as financial stability and a steady increase in prosperity and employment. This idea has after 2008 been compromised to its fundamentalist core.

Which means that the bank has to find other ways to stimulate employment as much as possible. The question is: how does a central bank fight hyper-unemployment? Models and cherished convictions don’t help as the southern European levels are ‘out of sample’. The best anecdotical examples are probably Finland (see below) and East-Germany. Finland solved its high 1991 unemployment with, among other actions, a 40% devaluation. Around the same time a de facto policy of internal devaluation was introduced in East Germany – and East-German unemployment is at present still above 10%. It has come down from 20% – but only because the labor force declined with 30%. Which indicates that internal devaluation is just too slow and monetary policy has to be highly aggressive: buying government bonds, buying bad assets from banks, paying down mortgage debts of overly indebted households, “Whatever it takes”.

1. Post WW II, 12% unemployment was the limit, in core developed countries: (graph 1)… //

… 4. Some Eastern European countries knew hyper-unemployment too, remarkably the countries with the highest unemployment before 2004 were most prone to have high unemployment post 2008, too: (graph 4).

A comparable story can be told for the same holds for Eastern European countries (graph 4). Notice the crisis after 2000. Notice that countries with high unemployment around 2002 were prone to have high unemployment again in 12. Did these countries suffer more from deregulation induced international fiat-capital flows which, according to this recent ECB study, can wreck a country and which only lead to non-sustainable demand and temporary work which was only superficially embedded in the economic fabric of the country. Notice that the Euro countries Slovakia and Slovenia do bad, compared with the others (the improvement in Lithuania is however caused by emigration, just like in East Germany).
(full text with 4 graphs).

Economic Links:

Economics textbooks – decades of scientific fraud and incoherence, on Real-World Economics Review RWER Blog, by mrijnknibbe, April 16, 2013;

German state acquires tax secrets on 1,000s Swiss bank accounts, on Russia Today RT, April 16, 2013;

Joe Stiglitz Blasts Our Wealthy-Coddling Tax System for Increasing the Returns on Rent-Seeking, on naked capitalism, by Yves Smith, April 15, 2013.

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