The mistakes now being made in the eurozone mirror those in the United States and Germany early in the Great Depression
Another month, another dismal set of jobless figures from the eurozone. Unemployment was up by 95,000 in April and if the trend of the past three months continues, an unenviable milestone will be reached by Christmas. At that point, there will be 20 million on the dole in the 17 nations that use the single currency.
Europe now faces a triple crunch: an interlocking human, economic and political crisis that will have devastating consequences if left unattended.
Let's start with the human cost. At present, the jobless rate in the eurozone is 12.2% – the highest since the single currency was created at the end of the 1990s. Among the under-25s, the situation is even worse: one in four are unemployed. The phrase "lost generation" can be over-used: on this occasion it is entirely appropriate to describe what is happening in Greece, where the youth jobless rate is approaching two-thirds of the young population.
Somewhat belatedly, eurozone policymakers have woken up to the social costs of the austerity programmes that have been enacted in a blanket fashion across the single currency. Studies of the labour market show that youth unemployment leaves deep scars that blight the chances of those affected throughout their life. Mass unemployment among young people also has the habit of spilling over into unrest and violent protest, as the Arab spring showed.
The economic crisis is caused by the unwillingness or the inability to realise that macro-economic policy in the eurozone is bankrupt. The mistakes made in Europe – a failure to loosen monetary policy aggressively enough and a tightening of fiscal policy during recession – mirror those made in the United States and Germany during the early stages of the Great Depression.
There is a marked and growing divergence between unemployment in the US and the eurozone that can be attributed to two factors: the Federal Reserve has been prepared to embrace quantitative easing on a grand scale and the European Central Bank has not; and fiscal policy in the eurozone has been relentlessly pro-cyclical, with taxes raised and spending cut even when it was clear economies were going down the tubes.
The eurozone's prolonged slump has forced some modest changes to deficit reduction plans, giving some member states longer to hit their targets. But Europe still appears a long way from embracing the sort of strategy that would start to bring the jobless total down. In part, that's because there is still a belief that the impediments to growth are all structural and have nothing to do with a deficiency of demand. In part, it's because the country where this belief is most entrenched – Germany – has an unemployment rate of 7.5%, low by eurozone standards.
Danny Gabay at the London-based consultancy Fathom rightly points out that the eurozone needs to rebalance and can only do this in one of two ways: Germany reflates and enables the countries in trouble to grow a bit faster and bring down their unemployment rates; or Germany does nothing and every other country deflates, leading to ever-higher joblessness.
If Europe continues to make the wrong choices, a political crisis looms. It has always been assumed in European policy-making circles that a break-up of the single currency needs to be avoided because it would plunge the eurozone into recession.
This, though, is mistaking cause and effect. As things stand, it looks more likely that Herbert Hoover economics and the resultant mass unemployment will destroy the euro.
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