08/10/2009: The unemployment story and the stereotypes

In January 2003, just before the Iraq war began, US Secretary of Defense Donald Rumsfeld scolded what he called “Old Europe” as congenitally uncompetitive and old-fashioned while praising the region’s more dynamic countries that embraced the challenges of globalization (and war).

Donald Rumsfeld’s “Old Europe” was a coded epithet for France and Germany, while he saw England as a progressive role model. Economic proof of his worldview could be seen in the unemployment statistics at the time. For years, the jobless rates of France, Germany and Italy seemed frozen above 10%, twice as high as in the UK and the US. Meanwhile, between 1994 and 2007, Spain cut its unemployment rate from roughly 20% to less than 8% and “Celtic Tiger” Ireland from 16% to just above 4%.

Today, in the wake of the financial crisis, those trends have reversed dramatically. The UK’s jobless rate now hovers at around 8%, up from 5% in early 2008. And the US had to absorb a rather shocking September labor market report that put unemployment at 9.8%, its highest reading since the early 1980s and almost the double that of two years ago. Even more spectacular, Ireland’s unemployment rate currently stands at 12.5% while Spain’s is 18.9%. In both countries, these are levels last seen before their (credit-fueled) “growth miracles” began. Meanwhile, Old Europe’s labor markets have withstood the crisis far better, with unemployment rates rising only slightly, if at all.

Are these developments strong enough arguments to dismiss once and for all the Anglo-Saxon model capitalism as the one true path for economic development? We doubt it. The real test will come when economic momentum really picks up again. Then we will see whether the unemployment rates in the US, the UK, Spain and Ireland will fall as fast as they have risen, thus proving the case for their “flexible” labor markets. Meanwhile, without knowing the outcome of this challenge, the resilience we have seen in the major Eurozone labor markets lately is one reason why Europe remains our favorite region among the developed equity markets.