Cross-posted from Middle Class Political Economist.
The Washington Post (via Calculated Risk) reported yesterday that the Eurozone, the 17 European Union nations that use the euro, hit its highest unemployment rate since the currency was created in 1999, at 10.7% in January. The Eurozone (and since the election of the Conservative-Liberal Democratic coalition government, the UK as well) has been giving us the world's largest experiment in the effect of austerity policies in the wake of the economic crisis. The results are definitive, and not pretty. The Eurozone economy is shrinking again (h/t Paul Krugman), and the four countries that have had the most severe budget cuts have the highest unemployment rates.
Select Unemployment Rates
Date Eurozone Spain Greece Portugal Ireland UK USA
1/2011 10.0% 20.6% 14.7% 12.3% 14.4% 7.8% 9.1%
1/2012 10.7% 23.3% 19.9% 14.8% 14.8% 8.4% 8.3%
Note: Greece and UK figures are for November 2011
Source: Eurostat, 1 March 2012
The European Central Bank, in contrast to the Federal Reserve, raised interest rates twice in 2011, due to its singular mandate to fight inflation rather than fight inflation and unemployment as the Fed is charged with doing. The U.K., since electing its new government in 2010, has engaged in sharp budget cuts. From the table above, we can see how well those austerity measures are working. While unemployment has fallen in five Eurozone countries (Germany, Estonia, Austria, Slovakia, and Finland), this has been more than outweighed by increases in the rest of the Eurozone, including France, Italy, and the Netherlands, as well as the four members in the table which have had the most substantial budget cuts. Indeed, the U.S. situation would have made more progress than it has (and it has been far too slow) if not for what Paul Krugman has called the 50 Herbert Hoovers of state budgets constrained by balanced budget requirements.
What does this mean for the United States? In 2011, the U.S. exported $268.6 billion worth of goods to the European Union. While the U.S. had a trade deficit with the EU, if the EU goes into recession its imports from the U.S. will fall much faster than U.S. imports from Europe, making it more likely that the U.S. recovery will stall. But the big takeaway is that the politics of austerity are proving themselves a failure, and the U.S. should resist calls to cut the budget here as long as unemployment remains so high.