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Wednesday, 1 February 2012

Unemployment in the Euro-zone is higher than ever, according to Eurostat. While the Baltic states are the stars of 2011´s unemployment development, the PIIGS Ireland, Greece and Spain are in deep(er) trouble.

Today, the December 2011 unemployment figures for the Euro-zone and the whole EU were presented by Eurostat, the European statistical bureau ( It became clear that average unemployment in the Euro-zone is higher than ever, although the percentage didn´t change compared to November 2011. The whole EU is trailing with 9.9%. Here are the pertinent snips from the Eurostat Press Release:

Euro area unemployment rate at 10.4%. EU27 at 9.9%

The euro area (EA17) seasonally-adjusted unemployment rate was 10.4% in December 2011, unchanged compared with November. It was 10.0% in December 2010. The EU271 unemployment rate was 9.9% in December 2011, also unchanged compared with November. It was 9.5% in December 2010.
Eurostat estimates that 23.816 million men and women in the EU27, of whom 16.469 million were in the euro area, were unemployed in December 2011. Compared with November 2011, the number of persons unemployed increased by 24 000 in the EU27 and by 20 000 in the euro area. Compared with December 2010, unemployment rose by 923 000 in the EU27 and by 751 000 in the euro area.
Among the Member States, the lowest unemployment rates were recorded in Austria (4.1%), the Netherlands (4.9%) and Luxembourg (5.2%), and the highest in Spain (22.9%), Greece (19.2% in October 2011) and Lithuania (15.3% in the third quarter of 2011).
Compared with a year ago, the unemployment rate fell in fourteen Member States, remained unchanged in Ireland and rose in twelve Member States. The largest falls were observed in Estonia (16.1% to 11.3% between the third quarters of 2010 and 2011), Latvia (18.2% to 14.8% between the third quarters of 2010 and 2011) and Lithuania (18.3% to 15.3% between the third quarters of 2010 and 2011). The highest increases were registered in Greece (13.9% to 19.2% between October 2010 and October 2011), Cyprus (6.1% to 9.3%) and Spain (20.4% to 22.9%).
Between December 2010 and December 2011, the unemployment rate for males increased from 9.7% to 10.2% in the euro area and from 9.5% to 9.8% in the EU27. The female unemployment rate rose from 10.3% to 10.6% in the euro area and from 9.6% to 9.9% in the EU27.
In December 2011, 5.493 million young persons (under 25) were unemployed in the EU27, of whom 3.290 million were in the euro area. Compared with December 2010, youth unemployment increased by 241 000 in the EU27 and by 113 000 in the euro area. In December 2011, the youth unemployment rate was 22.1% in the EU27 and 21.3% in the euro area. In December 2010 it was 21.0% and 20.6% respectively. The lowest rates were observed in Germany (7.8%), Austria (8.2%) and the Netherlands (8.6%), and the highest in Spain (48.7%), Greece (47.2% in October 2011) and Slovakia (35.6%).
Remarkable in these unemployment figures is the strong improvement of employment in the Baltic states in 2011. I presumed this was caused by an economic ´catching-up´ for these three countries that were still trailing the wealth levels in the other European countries.
But, as I didn´t know the exact reason for the decrease in unemployment, I asked my Twitter-friend Uldis Zelmenis, who lives in Riga, Latvia for an explanation. He sent me the following information, that is courtesy of Swedbank (
Strong export-driven investment growth in 2011
  • Most of GDP growth in 2011 came from investments into fixed assets; e.g., in 9 months of 2011, such investment grew by 24.6% year on year (YoY), contributing 5 percentage points to the GDP growth of 5.4%. The growth came from investments in equipment and machinery, which rose by 63% YoY in the first 9 months of 2011, making up 42% of all nonfinancial investments. Meanwhile, investments in buildings and infrastructure (40% of all nonfinancial investments) increased by only 9%.
  • The largest source of nonfinancial investments is companies’ own resources and loans. The rest is financed by EU structural funds. In 9 months of 2011, FDI inflow was about LVL 600 million, equivalent to about half of nonfinancial investments during that period. However, the largest part of foreign direct investment (FDI) was financial investment used to acquire existing real estate, and to strengthen banks’ balance sheets. Only 10% of FDI went into manufacturing.
  • Over the next few years, the Latvian economy will remain export driven. We expect single-digit growth in gross fixed capital formation during 2012. Growth of private sector investments depends on exports and, thus, the situation in the euro zone, whereas that of public sector investments depends on the state budget situation and access to EU funds

What is smart about the internal Latvian investments (bullet 1) is the fact that they have been done in fixed assets that create current and future value, like equipment and machinery. This is one of the reasons that unemployment fell so strongly in Latvia.
The Latvians fortunately avoided doing very large investments in real estate, as this is less likely to create extra value for the future. A factory or services company needs housing, of course, but bricks and mortar consume much money and produce nothing themselves.
Unfortunate about the Foreign Direct Investments was that they did exactly the opposite: investing in bricks and mortar and bank balance sheets. This is in majority ´improductive´ money.
Although the future seems to look bright for Latvia, the decrease in imports that is forecasted for the other European countries in 2012 is definitely a threat.

Industry stagnates; retail trade remains resilient
      Industrial production decreased by 1.3% in October compared with the corresponding period a year ago, while manufacturing grew at a ehavi 0.5%. This could have been the result of an actual drop in demand in foreign markets, but more likely the contraction was caused by adjusted inventories. 
      Retail trade growth has been somewhat more resilient – in October, it was still 9.5% higher than a year ago. However, depressed consumer confidence and a slower increase in wages, as well as increasing unemployment expectations, will deter spending. 
      After two years of surpluses, the current account slipped back into deficit and was 1.6 % of GDP during the first three quarters this year. Its further increase is likely to be limited due to the more cautious ehavior of consumers and possibly postponed investments by companies.

Next to exports, the increasing internal consumption seems to be fueling the Lithuanian economy. Both are probably responsible for the substantial drop in unemployment. During the last months of 2011, the Lithuanian consumers seem to be more cautious. This could have a negative effect on the outlook for 2012.

Export growth to slow substantially
  • Economic recovery after the recent recession was strongly led by the export and manufacturing sectors. After a period of high double-digit growth rates, slower growth is inevitable, however, due to the high base effect. More weight will be put on the slowdown by global uncertainties and the already evident weaker external demand. 
  • Due to high global uncertainties, which could result in a larger drop in export demand than currently expected, negative export growth cannot be ruled out. However, the impact of such a scenario will be more subdued as regards domestic demand

And from September 2011

      More broad-based economic growth has brought a strong employment increase, falling unemployment rate, and a soaring number of vacancies. Also, the labour activity rate is climbing, especially among youth. 
      Despite overall declining unemployment, the rate is still growing among the long-term unemployed; more active policy responses are needed to avoid difficult social problems from arising in the future. On the other hand, youth unemployment has fallen considerably, and in this area the main focus should shift from unemployment to education issues. 
      Gross wage real growth has been negative since late 2008. Although this is increasing competitiveness in the export-led economic recovery, wage growth pressures are building up due to structural unemployment. Also, there are figures indicating a possible increase in unofficial wages.

The situation in the ´European champion of employment´, Estonia is quite similar to that of the other Baltic states. A strong export, in combination with strong manufacturing output and an intensified internal demand during 2011 triggered the earlier mentioned, fantastic employment figures. But also for Estonia the future in 2012 looks less bright. 
However, I presume that all three countries will still show substantial growth in 2012, because of the catching up that they have to do. Therefore North-Eastern Europe might be, next to Germany, the economic driver in 2012 for the EU.

The employment situation in the PIIGS-countries, except for Italy, remains dire. Here is the unemployment development since 2007, inclusive the latest figures from December 2011. Data is courtesy of Eurostat, the charts are mine.

Unemployment development in the PIIGS-countries from 2007-2011
Data courtesy of Eurostat. Chart created by Ernst's economy for you
Click to enlarge
Where it concerns the employment situation, Italy is not a true PIIGS-member. Although its unemployment is not particularly low, the country is definitely in the mid-range within Europe with an average unemployment of well under 10%.
In my opinion, everything that Italy has to do in the coming months/years is getting rid of its huge debt and budget deficits at one hand and fire up the ailing economy at the other hand.
The best way to do so is looking for a way to reduce labor costs and corporate taxes, to reduce organized crime and corruption and to fight what I call The Italian Disease: being extremely slow and inaccurate with deliveries and exports.
Where it concerns quality, craftsmanship and sheer beauty, Italian products are often second to none. But where it concerns reliability of Italian factories and exporters, the best advice to their customers is ´to remain patient´.
For the other PIIGS-countries including Ireland, I repeat yesterday´s advice to have a good look at ´the Celtic Tiger´ for contemplation and inspiration.

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