There seems little concern about the continuing rise in unemployment across the euro area. If European leaders were really worried about the situation, they would be planning for the weaker economies to leave the single currency in an early and orderly fashion
Yesterday Italian unemployment figures came in at 8.6%. That is bad news for many Italians, but by euro area standards it was a good performance. An astonishing 23% of the Spanish workforce is unemployed, including 45% of young people. Eighteen per cent of the Greeks of working age, 14% of the Irish and 13% of the Portuguese rely on out of work benefits for their living. Even in France almost 10% of the workforce is without a job.
The euro area chiefs do not seem to worry unduly about this waste. They seem unconcerned that their currency scheme is one of the main reasons why unemployment is so high in these countries. The euro has delivered a series of uncompetitive economies in the south. It delivered a credit and property bubble in Ireland and Spain that is proving painful now it has burst. It has created a very weak banking system throughout the euro area. The currency requires countries in trouble to follow mutually assured deflation as their prime policy.
Yesterday was another bad day for the euro in other ways. UniCredit bank shares fell another 14% on the back of their deeply discounted issue of new shares to buttress their capital position. In sympathy, euro area bank shares generally fell by around 5% on average in just one day, after a prolonged period of weakness. Investors worried about the volume of new bank shares the other banks will need to issue, and assume they will be able to buy those at well below current prices, as UniCredit shareholders have now discovered.
Hungary, a candidate to become a member of the euro, saw its bond rates forced up to almost 10% and is now seeking help from the IMF. Italian state 10-year borrowing rates went above the magic 7% again, whilst Spanish 10-year rates also rose to 5.63%.
The European Central Bank’s giant injection of more cash has not injected the confidence in the system that all hoped. Mr Monti, the new technician PM of Italy, has had to travel to Brussels for more talks. Nicolas Sarkozy and Angela Merkel will be back together attempting another package to save the euro, probably next week.
The truth is the euro system has unleashed a banking crisis on the back of a sovereign debt crisis. They failed to keep banks’ capital up to sensible levels in the better days, and are now behind the curve in the bad days. Meanwhile, the overborrowed governments are struggling to raise the colossal sums they need to keep going.
If they were at all worried about the unacceptably high unemployment, they would be planning and early and orderly exit from the currency of the weakest economies. They would also be sorting out the banks in need of state support, deciding which bits to back and keep and which to put into orderly administration. Spain announced this week another 50 billion Euro hole in its banks and related property market.
John Redwood is the MP for Wokingham and is chairman of the Conservative Economic Affairs Committee. This post first appeared on John Redwood’s Diary
