Dead jobs are on the ECB's hands

Catastrophic economic news continues to flow out of the eurozone, this time it was the unemployment data for April.

The economic depression gripping the bulk of Europe was revealed with the unemployment rate rising to 12.2 per cent, the highest level ever recorded. A year ago, the unemployment rate was already a disastrous 11.2 per cent and the fact it has risen since then shows how things are going from bad to worse for what is still the largest economic region in the world.

The 1 percentage point increase in the eurozone unemployment rate in the last year is yet another sign that its economy shows no sign of stabilising, let alone turning towards recovery. This is evidence, if more were needed, of a monumental policy failure from both government and the European Central Bank.

The ECB should be humiliated when it looks back on its decisions to hike, yes hike, interest rates on two occasions during 2011. The ineptitude of this implementation of monetary policy is showing up now with 19.4 million people unemployed in the 17 nations that make up the eurozone and 26.6 million people in the 27 countries of the European Union.

Compounding the ECB’s folly was its lethargy in deciding to reverse those inappropriate rate hikes of 2011.  Even with scope to move interest rates lower, the ECB cut interest rates only once in 2012 and waited until last month for the latest rate cut when it was obvious it had scope to take rates towards zero. Even now, interest rates are 0.5 per cent and have scope to be cut.

It must be noted that the ECB’s policy folly is only part of the problem. Perhaps more significant is the fiscal policy settings which have seen cuts in government spending and hikes in tax when overall GDP has been falling. It is preposterous having the government sector, which accounts for between one-quarter and one-third of GDP in most eurozone countries, going into sharp reverse via fiscal austerity at a time when private sector demands have been bludgeoned by the banking and property debacle. It is policy incompetence.

What is going on in policy makers’ minds?

What do they think when they see the unemployment rate in Greece at 27 per cent and 26.8 per cent in Spain. As absolutely depressing as those numbers are, there are another 12 countries out of the 27 in the European Union with an unemployment rate above 10 per cent.

More cuts in spending? Tax hikes? Cuts to wages, services, jobs as a means of fixing the economic ills of Europe?

Despite some minor respite in recent months in the fervor with which budget cuts and tax hikes are being pursued, the government sector will continue subtracting from GDP growth in Europe until 2015. This could see the unemployment rate break above 12.5 per cent if the private sector does not pick up the slack.

Part of the policy zealotry is linked to fears about an inflation break out. This looks to be an absurd phobia given the depressed economic conditions and evidence of disinflation that shows up with ever increasing regularity.

The ECB concern about inflation as a reason for its incredibly hawkish stance on monetary policy in recent years has no factual support.

In addition to the dreadful unemployment data on Friday night, Eurostat released the inflation data for April which confirmed annual inflation running at 1.4 per cent in the eurozone as a whole. Excluding the volatile items (energy, food, alcohol and tobacco) the annual core inflation rate was a miserable 1.2 per cent.

This low inflation should not be a surprise given Europe has recorded six quarters in a row of negative GDP growth, with the depression conditions in many countries delivering deflation in some countries. Even when the eurozone was recording decent growth prior to the crisis, inflation was contained with annual core inflation below 2 per cent every month since 2003.

It is all very well to be vigilant against inflation, as all good central bankers must be, but to have such a poor reading of inflation risks when the economy you are managing is sinking in quicksand is hard to excuse.

The glimmer of hope for a recovery in the early part of 2013 has been extinguished. Policy errors are to blame, which is a huge pity for the millions of people unemployed and even those lucky enough to have a job whose living standards are going backwards at a rapid pace due to fiscal austerity.