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.
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.”