In, “Europe Should Stop Listening To Germany“, I very briefly mentioned the advantage Germany and other nations of the austerity chorus have over their southern counterparts thanks to skewed bond analysis employed by global markets. Part of the problem stems from the ability of each nation’s central bank to issue new debt, thus allowing markets to assess each issue state-by-state despite every issue from the Eurozone being euro-denominated. On the other hand, nations who supported requiring deep spending reductions from countries seeking emergency capital increased expenditures in the very same areas thanks to markets flocking to their debt as others languished under austerity’s side-effects.
Long-term sovereign debt yields, unemployment rates, and GDP data tell a tale of a group of countries profiting from the economic pain imposed on others. With the majority of the continent contracting and a critical banking union treaty in the wings, it’s high time the EU closes the Dr. Goose School of economic recovery and focuses on adjusting capital structures between Europe’s central banks.
For Whom The Bonds Toll
To tell the bond yield story, I’ve worked up a new chart (courtesy of the Wall Street Journal‘s historical bond yield database) that tracks the interest rates offered on 10-year debt from a select group of Euro-area member states: Germany, France, Austria, Italy, Spain, and Portugal. Each data point is the yield on 10-year debt at the end of the first trading day of every month between 2 November, 2009 and 20 May, 2013.
The extreme left of the chart shows that rates between the six are comparable, which makes sense given that only Greece was under the gun at the time. It wasn’t until the Greek crisis went unresolved that markets turned their attention to the Euro-area’s larger players like Spain and Italy, where rates rose rapidly through 2010 and 2011. In fact, the data shows that Spanish and Italian debt fluctuated between 5 and 7 percent between June 2010 and April 2013 when yields on Spanish 10-year debt broke below 5 percent.
Portuguese debt tells a more dramatic version of the same story. The slow response to Greece’s rising debt concerns spread “contagion” throughout southern Europe, and Portugal was especially hard-hit as austerity reforms combined with market speculation drove bonds from 3.754 percent in November 2009 to a high of 15.024 percent in February 2012. Over the same period, bonds out of pro-austerity nations took the opposite turn. France and Austria have seen steady declines in rates on new issues after a short rise from September 2010 until April 2011. Germany, often seen as leading the pro-austerity charge, has comparatively better rates over the entire period save the session on 2 November 09. Notice their line, shown in black, saw its greatest period of decline over the same period where Italy, Spain, and Portugal’s rates accelerated to their highest levels.
A Song of Expand and Contract
To make the data more comprehensive I took a wider sampling of EUROSTAT data on real GDP growth to include figures from Greece and Cyprus, but to make it easier to see I felt it best to break the two groups into two separate charts. As a note, the data here shows each nation’s GDP growth (positive or negative) to the previous year and the figures for 2013-2014 are at this point, projections.
To the left is the data for Cyprus, Greece, Italy, Spain, and Portugal and nothing here should be surprising. For the most part growth rates were fairly high, particularly for Greece, Cyprus and Spain, until the recession began in earnest in 2009. All save Greece moved into positive territory between 2010 and 2011, but again austerity and a lack of progress on banking reforms took the group deep into economic contraction. High bond yields played a role here since central banks needed to continue to raise capital to cover existing obligations and pool collateral for emergency funds. Conditions were exacerbated by austerity reforms that required large cuts to public sector spending thus rapidly increasing unemployment levels and impairing economic activity. This is especially evident in Greece, who has yet to see a positive growth year since 2008, and in Cyprus whose recent banking crisis has deepened fears around the currency union’s sustainability.
The numbers for the pro-austerity troupe trend in similar fashion from 2003 to 2008, with steady upticks in GDP growth year over year until the onset of recession in 2009. However, take a look at the rebound in the German and Austrian economies in 2010 and 2011. France begins to taper off into 2012, but Germany and Austria slowed less substantially and have only recently started to show signs of weakness. Again the overall statement here is that under the current course, the nations who benefit most from the time markets allot for reform and growth aren’t the countries that actually need the relief from market scrutiny.
Where Are All Those Jobs Exactly?
The last chapter in our tale deals with the changes in unemployment, public sector spending, and balance sheet liabilities between our two groups. Since the outset of the crisis I’ve argued that the structure of Europe’s austerity programs eventuated in a series of growth-negative outcomes, with high unemployment as the most noticeable of these. Greece, in particular, evidences this point since the bulk of its economic foundations rested on a steady stream of capital committed to its public sector which underpinned wage security, labor turnover, and employment growth. The reforms required for its rescue sum hit both its public and private sectors through reductions in government payrolls, wage reductions, and salary caps which arrested hiring rates and slowed labor turnover.
On the right I’ve charted the change in unemployment rates for our group of 7 nations (Cyprus is listed accidentally) using BLS survey data collected monthly between January 2007 and December 2012. Jobless rates in Spain were comparable to those seen in Italy, France, and even Germany until unemployment begin to gain momentum in April 2008 and rose rapidly into May of 2010 when the growth rate slows before taking off again a year later. Greece rises quickly later towards 2010, about the time its financial crisis birthed a political one, and then it ascends rapidly to match Spanish levels. At present Spain, Greece, and Portugal remain at the top of the jobless heap with Greece and Spain fast approaching 30% of their labor force without work. On the other hand, Austrians have enjoyed relatively stable levels between 4.5 and 5 percent, while German joblessness has decreased steadily since 2007 hovering around 6 percent.
Three More Reasons Europe Needs Less Deutsch
1. German-led austerity causes problems its shortsightedness doesn’t solve. Central banking issues aside, exchanging short-term rises in unemployment for deficit reduction is more effective when the level of economic activity increases enough to compensate for the shortfalls in public sector spending. The German template targets the public and private sectors simultaneously, reducing competitiveness, countermanding economic productivity, and contracting the labor market.
2. Germany, perhaps even more than Austria, has benefited enormously from the austerity run amuck. Better borrowing rates have allowed Germany to resist the general contraction in GDP growth seen across the Eurozone, and its labor markets have benefited from the breathing room. Long-term unemployment and homelessness have reached record levels in Spain and Greece, with rates increasing in France and Italy.
3. The strategy isn’t working, even for Germany whose most recent GDP data suggests its economy is no longer immune from the debt crisis. First quarter 2013 data shows France has returned to recession, Italy continues to struggle to reign in rising debt and coalesce politically, while unemployment (particularly among the under-30 crowd) reaches new highs in Spain and Greece. The lack of progress on a monetary stimulus and central banking reforms have cost Europe more than it has gained from standing on austerity’s soapbox. The key to recovery is reform with growth as a guide, and Europe needs to amplify competitiveness in the private sector while centralizing national banking and restructuring tax policy to combat fraud and support consumers.