Amid the continuing arguments about whether the UK started to pack its bags ahead of leaving the EU last week, the more serious problem is that the Eurozone leaders have signed up for a future of deflation, recession and mass unemployment. The debt crisis remains fully in force, since nothing agreed last week actually makes investors much more likely to buy Eurozone sovereign debt. I expect most countries will still see their credit rating cut soon. The German-led plan amounts to aiming for balanced budgets, cutting spending and hoping that somehow that will save the Euro.
What it will undoubtedly do is push the Eurozone economy further into slump, raising unemployment above its current 10.3% rate. In Ireland it’s 14.5%, in Greece 16%, and in Spain an appalling 21.5%. All the Euro has to offer the people of these countries is years of unemployment, falling living standards and bitterness. How this is supposed to increase the cohesion of the EU I don’t understand.
Nor will it help the debt problem. We face a prolonged debt-deflation period in which GDP will fall faster than public debt, so the debt-to-GDP ratio will keep worsening, private sector investors will keep well clear of the Eurozone (except maybe Germany) and Europe will lose a decade of growth while national divisions harden. The UK may unfairly get some of the blame for this, as it’s easier to scapegoat the one major European economy that didn’t want to join this club of destruction than accept that the Euro has been a disaster economically and politically.
Unemployment is a terrible thing. It’s not just about the loss of income. We know from many studies that unemployment increases depression and family breakdown. Long term unemployed people become increasingly demoralised, lose their ability to work and lose their human capital. So high unemployment reduces future economic output beyond the fact that people are currently not working, a phenomenon economists call hysteresis.
As a school student studying economics, I had my own glimpse of the evil of unemployment. Near where I lived, a town called Corby, almost entirely dependent on jobs in the local steel works was told that the works would shut. The father of a friend of mine, well a girl I thought at the time I was in love with (it was years later before I discovered what real love is, but when you’re young it seems just as intense), was made redundant when the steel works shut and the whole family went to pieces. It was very sad to watch. Corby eventually generated new jobs to replace the closed steel works. When I say eventually, I mean it took 12 years, in a well located town in the booming south of the UK. In a wider European slump it would take far longer.
I blogged before about the disastrous role of high unemployment in German history. It baffles me that German politicians aren’t more concerned about what their balanced budget approach is going to do to Europe. They are killing the Eurozone, slowly, and with it the EU.
Are there any estimates of how much impact will this worsening in Europe cause to the UK? If the EU economy freezes and a recession takes place, it should also cause a significant depression in the UK financial market as well due to the high volumes of economic and financial integration.
Most economic commentators forecast a recession in Europe from next year, except possibly Germany. The implementation of the planned balanced budget amendments would damage growth in 2013 and later (if it ever gets implemented). The UK currently has a slightly better outlook because of sterling’s devaluation but its biggest trading partner is the rest of the EU so that outlook is likely to get worse.
The UK’s financial markets are less connected with the UK economy or even Europe’s and more with global flows. But a fall in European economic activity is likely to damage capital raising and M&A activities, which are already quite low. But there should be lots of financial restructuring work around.