The eurozone’s unemployment problem is the “toxic effluent running through the veins” of the European economy right now, and is the source of many of the continent’s problems, according to the latest note from notorious perma-bear Albert Edwards.
As the voice of the market bears — people who think imbalances in the financial system will lead to a collapse — Edwards, a strategist with Societe Generale, is given to making grand proclamations about the state of the world.
So far this year he has predicted a “tidal wave” of corporate defaults in the US, argued that central bankers are going to destroy the global economy and plunge the world into chaos, and said that the government could “concrete over the entire length and breadth of the UK and house prices would still rise.”
Edwards’ latest assertion is that much of the eurozone’s economic woe is caused by the single-currency area’s unemployment problem, and that until Europe can solve the issue, the likes of France and Italy will never see substantial economic growth.
In Societe Generale’s Global Strategy Weekly note, Edwards writes (emphasis his):
Unemployment is the toxic effluent running through the veins of much of the eurozone economy. The boom and bust of the economies of Spain, Greece, Portugal and Ireland should have come as a shock to no-one. It played out exactly as a classic emerging market balance of payments crisis, eg the 1994 Mexican Peso crisis and the 1997 Asian debacle. An initial economic boom results from pegging the exchange rate and importing the wrong monetary policy. This ultimately led to an uncompetitive exchange rate, a gaping current account deficit, and finally an economic and credit bust. What is far more shocking is what has happened to Italy and France. Ten years ago not only was German unemployment above that of France and Italy, it was SUBSTANTIALLY above them!
Here’s the chart showing how little unemployment in the eurozone’s second and third biggest economies has fallen in recent years:
Edwards goes on to argue that the big reason that both France and Italy have struggled to push unemployment down is that neither country experienced any sort of bubble prior to the 2008 financial crisis, just sustained misery and stagnation. As a result, unemployment didn’t go up in the immediate aftermath of the crisis, and therefore had little room to come down afterwards. Here’s Edwards again (emphasis ours):
The eurozone total unemployment rate (red line) has declined since the 2011/12 eurozone crisis as a reasonable economic recovery has unfolded in economies like Spain after what turned into an economic depression from their 2007 peak. But both France and particularly Italy did not ‘enjoy’ (if that is the right word) any economic bubble in the run-up to the 2008 Global Financial Crisis. At least in Spain, Ireland, etc, people understood why they had a hangover, having partied hard and drunk to excess from the credit punchbowl.
He continues (emphasis ours):
But in France and particularly Italy, no such party occurred in the run-up to 2008. Italy did not experience boom and bust – it experienced stagnation and then bust and now more stagnation (see chart below). Italians are much more discontented than say, the Spanish, as they fear stagnation is a now permanent state of affairs. Indeed the Italian economy has barely grown one jot since it joined the eurozone at the start of 1999 while Germany has grown rich. As inevitably people compare their fortunes with that of their neighbours, the Italians are mighty pissed off.
Persistently high unemployment, Edwards argues, has helped cause a “destruction of skills” in countries like Italy, which in turn is contributing to low productivity and stagnant economic growth.
Until these problems can be solved, the likes of France won’t be able to grow strongly, which in turn will lead to more and more discontent building with the European Project, bringing greater political turmoil and the potential for more nations to exit the European Union.