Unemployment Rates Put Covid Behind Them, But What Is in Front of Them Is Frightening

Unemployment rates in the European Monetary Union are stable in June; the overall rate is at 6.6%. Unemployment in the EMU has been at 6.6% for three months in a row; it fell to 6.6% in April from 6.7% in March; it had been at 6.8% in February; it stood at 6.9% in January.

The EMU unemployment rate has stabilized after falling in the economic recovery in the post-COVID period. But unemployment progress has slowed. Unemployment rates rose month-to-month in June in Finland, Portugal, Ireland, and the Netherlands. Month-to-month unemployment rates were unchanged in Belgium, France, and Luxembourg.

The pace of decline in the unemployment rates has slowed in recent months. The number of countries in the table with unemployment rates falling over three months has varied between 12 (all of them) and 10 from mid-2021 until May 2022. This month the number of countries with the unemployment rates falling over three months is down to 7. That is still the majority, but there's a clear fall off in the tendency for unemployment rates by country to fall.

Still, unemployment rates are not dramatically increasing either. There is some tendency for unemployment rates to rise, but it's too soon to call it a significant trend. In April there was one country that saw the unemployment rate rise; that was Belgium. In May there were month-to-month increases for unemployment in Austria, Belgium, Portugal, and the Netherlands. In June there were also four Finland, Ireland, Portugal, and the Netherlands.

These may or may not be isolated cases. But if we look at correlations among unemployment rates across this group of 12 EMU member countries, we find the country with the highest correlation among the countries in the table is the Netherlands where there is a correlation of 0.70. France ranks second with the correlation of 0.65. Belgium ranks third with the correlation of 0.64. Two of these countries are showing unemployment rate increases in May or June or both. If we calculate correlations on changes in unemployment rates for this same group of countries, the Netherlands ranks first, Spain ranks second, France ranks third, and Belgium ranks fourth. The point still holds; two countries where the unemployment rate is rising tend to be relatively important bellwethers for the EMU in terms of unemployment rates and their changes.

Just for the record, and for comparison, the three countries with the lowest correlations with fellow members are Germany, Luxembourg, and Ireland, in that order. While Germany is a very important economy in the euro area and the largest economy as well, it tends to go its own way. That is a problem in terms of making policy for the union, because Germany is often doing things differently from the rest of the monetary union but because Germany's economy is so large it will be dominating and pushing pooled statistics for EMU in a certain direction that may not be representative of the union as a whole - certainly not representative of the union as represented by individual countries.

Recovery is complete but... Based on the data in the table, it is reasonable to call the recovery from the COVID recession complete. Unemployment rates across all countries in the table are below their historic medians except for Greece whose employment rate is almost exactly on its median at a 50.9 percentile standing. Only Belgium has an unemployment rate above where it was just before COVID struck. Belgian's rate is higher by 0.3 percentage points. Irelands rate is equal to what it was before COVID struck. By comparison, the United States and Japan have unemployment rates that are just a tick or two higher than they were before COVID struck.

The cost of 'progress' It is now clear that this progress came at a cost and the cost has been rising inflation in the EMU as inflation is rising and well above target. The U.K. has inflation rising well above target. The U.S. has inflation rising and well above target. The central banks in these areas are engaged in a process of trying to put the toothpaste back in the tube. At the same time, the ECB is trying to implement policies that will protect its most vulnerable members as it raises rates. Fiscal policy now is off the burner as economies have grown and have made substantial progress and most have unemployment rates that are relatively low or at least moderately low by historic standings. But inflation is well above target, and it requires significant remedial efforts, and these efforts may threaten the growth that was so hard-won – as well as the retention of low rates of unemployment.

Bad lessons from the Great Recession? One of the problems was that the wrong lesson was learned in the recovery from the Great Recession. In the Great Recession, extreme monetary stimulus was applied along with substantial governmental and fiscal help of various sorts and despite all this government and central bank intervention the inflation rates globally remained low. Still, central bankers at that time didn't seem to appreciate the low inflation environment and then in the United States, at least, the central bank thought to raise rates back to or toward or the neutral level as it was concerned that it had left rates too low for too long.

Pandemic policy should not equate to financial distress policy That increase in rates by the Federal Reserve proved to be a mistake and the Fed was forced to backtrack on that policy in 2019. Then in 2020 COVID struck. Policies put in place to deal with COVID globally unfortunately unraveled much of the highly competitive global economic infrastructure that was in place including impeding free trade, destroying many global supply lines, as well as creating specific intrinsic local damage such as scaring people out of the workforce. The upshot is of this was that the recovery period from COVID could not be compared to the recovery period from the Great Recession. But central bankers and fiscal authorities did not appreciate the difference. They piled on stimulus that created a very unexpected inflation and now they must deal with it.

Take nothing for granted The new lesson about inflation is that… you never know. Central banks and fiscal policy makers always need to be on alert for the potential for inflation to rise. Inflation may rise for very unexpected reason. Inflation may arise when the central banks do not think there are any inflation forces out there at all. But inflation doesn't necessarily obey the rules that central bankers want to obey. It may allow central bankers for a while to engage in behavior that should be inflationary but doesn't create inflation, and then suddenly enable those same policies to set inflation in play. The essence of being a central banker is to pay attention to past learning and to be attentive for new threats to inflation. When central bankers become too enamored of supporting growth, you can be sure that something bad lies ahead. The central bank's job is to control inflation and help foster financial stability. When other tasks are put on its plate that becomes confusing and sends policy in the wrong direction. Getting back on the right road can be a painful experience.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.