Austerity Is a Disaster: The Lesson of Europe's Record Unemployment

Euro zone unemployment just hit a 15-year high. German unemployment just hit a 15-year low. What can those of us across the Atlantic glean from this seemingly bipolar state of affairs? That austerity, every economic conservative's favorite prescription for an ailing economy -- the medicine Republicans here in the United States are pushing hard -- is an utter disaster. 

A few euro zone members, including Germany and the Netherlands, are enjoying a relative jobs boom. And yet, Europe's overall unemployment rate is 10.8 percent. How is this possible? Because of  depression-level unemployment in Europe's austerity-plagued periphery. The chart below compares unemployment among the euro zone's 17 members (courtesy of Eurostat). 

This should put to rest the notion of "expansionary austerity" -- that is, that budget cuts can spur growth by giving businesses increased confidence. It has been an epic, epic failure with interest rates at zero. The more a country has cut, the more unemployment it has. Greece, Spain, Portugal and Ireland have all had markets (and Germany) force them to radically reduce deficits amidst already deep slumps. The result has been even deeper slumps. Joblessness has jumped to levels not seen in advanced countries since the 1930s. 

It all makes the euro look rather unworkable. Absent fiscal transfers -- which the Germans regard as verboten -- how do you make policy that fits both countries with sub-5 percent unemployment and those with over-20 percent unemployment? You can't. It's a classic one-size-fits-none predicament. Splitting the euro in two might be the best option. It would allow the crisis countries to devalue instead of deflate, while core Europe could avoid the inflation it so desperately fears. 

It's not clear, though, which camp France would belong in. With its double-digit unemployment (and growing homelessness), France inhabits a middle ground in between the core and the periphery. If misplaced Gallic pride pushed the French to join the northern Europeans, they might find themselves in a position similar to the British in the 1920s: persistently uncompetitive due to an overvalued currency. Trying to be part of the core might push France towards the periphery.

The euro creates a world of bad choices. Austerity has made these bad choices worse. But the problem with austerity isn't the euro. The problem with austerity is austerity. It doesn't work. At least not in a world of zero interest rates. Just look at Great Britain. Despite controlling their own currency, their recovery has also lagged ours -- a fact that Adam Posen of the Bank of England blames on premature fiscal retrenchment.

Which is to say: a recovery is worth a deficit.