What to do about the eurozone?

Is the eurozone in recession? Eight consecutive months of rising unemployment indicate that the region could indeed be facing another economic downturn.

According to Eurostat, the European Union’s version of the Bureau of Labor Statistics, the unemployment rate in the 17 countries that use the euro climbed to 10.8 percent in February, its highest level since the currency’s introduction in 1999. Seven eurozone countries have unemployment rates of more than 10 percent; in comparison, the United States’ unemployment rate is 8.3 percent. Past historical periods have also seen lower unemployment rates in the United States than in most of Europe, but the difference over the last couple of years is that joblessness in the eurozone is obvious collateral damage stemming from the embrace of fiscal and monetary austerity.

“Europe’s leaders just haven’t been nearly as committed [as U.S. leaders] to boosting demand with expansionary macroeconomic policies, either fiscal or monetary,” says EPI macroeconomist Josh Bivens.

“To be clear, the United States hasn’t provided adequate support to its economy and job market—but Europe has been even worse,” he continued.

In Spain, nearly a quarter of the labor force is unemployed, including more than half of workers under age 25. Spain’s plan to combat its troubles? A $36 billion austerity package passed by its new conservative government. As EPI has argued before, austerity measures are inappropriate solutions to unemployment crises. This is clearly the case in Greece, Ireland, and Portugal, all of which had to enact austerity measures as a condition of receiving bailouts. In these countries, austerity has compounded economic troubles and failed to improve staggeringly high unemployment rates.

The aftermath of clashes between protesters and police in Barcelona on March 29 by workers participating in a general strike against the Spanish government's economic reforms. (From Flickr Creative Commons by Sergio Uceda)

So how can the eurozone avert another crisis? Bivens thinks there are two separate questions that need to be answered. First, how are countries like Greece (and if we’re unlucky, Ireland, Italy, Portugal, and Spain) going to pay their debts (and how much of their debts will be written off by creditors)? Second, how are these same countries going to see growth in the next decade sufficient to ward off disastrous unemployment levels?

Bivens believes the second question gets much less attention—but is far more important.

“A key barrier to a country like Greece achieving growth in the coming decade is the lack of an independent monetary and exchange-rate policy,” says Bivens. “Greece absolutely needs to gain competitiveness in global markets as part of its medium-term macroeconomic strategy.”

He continued, “There are two paths there, exchange-rate adjustment or ‘internal devaluation’ [i.e., having Greek wages and salaries grow painfully slow for years]. The latter course is much more damaging; just look at Latvia, which fully embraced that strategy. The real lesson of the euro crisis is that all the tools of macroeconomic management need to be taken much more seriously than they have been.”


  • Holtj0101

     There appear to be two broad macroeconomic paths that Greece can take. The first is increased fiscal spending by European parliament, which it needs member authorization to do so. The second is it can give up the euro and start using its own sovereign currency. For advocacy of the second rout see: http://bilbo.economicoutlook.net/blog/?p=18873

  • Benleet

    Dollars and Sense magazine, Jan. 2012 issue, has an article “The U.S. is not Greece” explaining the crisis in Europe in much the same way as Bivens and in this article. “The four southern Eurozone economies and Germany all had modest current account deficits (the broadest measure of a trade deficit) in 2000. A decade later Germany enjoyed a current account surplus of 5% of its GDP, while the southern eurozone economies were saddled with a current account deficit of 5% of their GDP. And Greece’s current account deficit has ballooned to 10.5% of GDP. Usually countries at such a severe trade disadvantage would devalue their currency. ” Wages in Germany were capped, the export-import balance collapsed, the economies in the south were cut down. I find this D and S article the easiest to understand explanation, http://www.dollarsandsense.org/archives/2012/0112millersciacchitano.html

  • Tq

    Great, there goes my plan to move to Europe once I get laid off here.

  • Bupe K. Chama

    Today’s 
    The Article in Daily Currency Update confirms all the fears…http://app.streamsend.com/private/143c/icr/32ZRnin/browse/16039189