EMU: The Policy Path Becomes More Treacherous

The European Monetary Union approaches reduction in its unemployment rate in October to 6.5% from 6.6% in September, continuing the long crawl lower back toward its previous trend decline that had been in place before COVID struck and interrupted that improving progression.

The numbers of unemployed have declined in each of the last two months, a decline in numbers of 1.3% in October and 0.3% in September. Since the unemployment rate is a ratio calculation that involves both the number of people unemployed as well as some estimate of people in the workforce, it's encouraging to see that when we look at the numbers unemployed that this part of the unemployment rate calculation continues to move lower on its own - it's an incredibly good signal.

However, when we back off to look at employment trends, we begin to see that the width of the yellow brick road appears to be narrowing. The table includes 12 of the longest-standing members of the European Monetary Union over 12 months. Eleven of these 12 countries have seen their unemployment rates drop. The exception is the Netherlands where the unemployment rate is higher by 1% over 12 months. Over six months the unemployment rate is higher and five of these twelve countries an unchanged and one other (Germany). The countries with higher unemployment rates over six months are the Netherlands, Luxembourg, Portugal, Finland, and Austria- a somewhat eclectic mix of countries. Over three months unemployment increases in four countries and is unchanged in two others. The unemployment rate is unchanged in Austria and in Germany. The unemployment rate is higher in Luxembourg, Ireland, Portugal, and the Netherlands.

Monthly data for the European Monetary Union also shows a somewhat uneven hodgepodge of changes in unemployment, but most countries are showing declines. Some show increases and the number of them show unchanged unemployment rates from period to period.

For the record, on the same timelines the United States has an unemployment rate that's higher by two-tenths of a percentage point; the U.S. rate is lower by nearly a percentage point over 12 months. U.S. unemployment ticks slightly higher over six months and three months. Japan has an unemployment rate that's lower over 12 months by 0.2 percentage points. Japan's unemployment rate is unchanged over three months and six months.

The European, U.S. and Japanese experiences are therefore not all that different in terms of momentum. The U.S. and Japan show an earlier breaking as their aggregate unemployment rates rise of and unchanged over six and three months but otherwise show a decline year over year, their business cycle positions appear to be roughly similar.

Inflation is high particularly in the United States and in the European Monetary Union. Central banks there are raising rates and the U.S. rates are being raised rather vigorously. This should put declining unemployment rates at risk and that's why I consider the policy road to be one that is becoming bumpier and narrower. Central banks don't encounter as much pushback when they're raising rates mildly and economic times remain good. However, when economic times begin to turn bad and central banks are raising rates with more vigor, it tends to focus more criticism on the central bank. Even though with higher inflation central banks are recognized to have a responsibility to bring such inflation to heel, it's a time when those that even dovish central bank members who may have endorsed extra low interest rates in the previous periods will now turn their attention to being critical of the central bank for having let inflation rise at all. Policy discussions and criticisms are rarely fair. However, they are almost always political.