Unemployment Fuels Debt Crisis

Job-seekers wait outside a job center before opening in Madrid, Spain. Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. Photographer: Angel Navarrete/Bloomberg

Surging unemployment rates from Spain to Italy and Greece are threatening efforts to quell the region’s debt crisis and keeping bond yields close to record premiums relative to benchmark German bunds. 

Joblessness is soaring as European nations reduce spending, igniting strikes and protests from Athens to Madrid. Unemployment in Spain surged to almost 24 percent, pushing the euro-region level to 10.8 percent in February, the highest in more than 14 years. Italy’s rate is at 9.3 percent, the most since 2001, hampering efforts to spur economic growth.

Deepening recessions in Italy and Spain contributed to a five-week slide in Italian and Spanish bonds as the shrinking tax base helped lead to both countries raising their deficit targets. The yield premium investors demand to hold Spanish 10- year debt over German bunds reached a four-and-a-half-month high this week.

“The higher the jobless rate, the more that has to be spent on benefits, creating the potential for a negative spiral,” said Christian Schulz, an economist at Berenberg Bankin London and a former ECB official.

Berenberg Bank predicts euro-region unemployment will peak at 11.5 percent in September, he said.

The extra yield investors demand to hold Spanish 10-year bonds rather than similar-maturity German securities was 411 basis points yesterday, compared with an average 130 during the past five years. The rate has risen more than 80 basis points this year. The spread was 376 basis points for Italy and 1,072 basis points for Portugal.

Youth Joblessness

Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. The country is now home to more than one third of the euro-region’s jobless and more than half of young people are out of work.

Hundreds of thousands of Spaniards protested on March 29 in a general strike against Prime Minister Mariano Rajoy’s overhaul of labor market rules and the deepest budget cuts in at least three decades that are pushing the economy deeper into its second recession since 2009.

“Spain faces formidable challenges, especially concerning youth unemployment,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told lawmakers at the European Parliament in Strasbourg Wednesday.

Italy’s jobless rate rose to the highest in more than a decade in February and the International Monetary Fund forecast on April 17 that unemployment will reach 9.9 percent this year. Italian bonds reversed morning gains yesterday after the government cut its growth forecasts and abandoned a goal to balance the budget next year.

Estimate Revisions

Italy’s gross domestic product will contract 1.2 percent this year, more than twice the previous forecast, and the deficit will end next year at 0.5 percent, more than the 0.1 percent previously forecast. The Italian announcement came six weeks after Rajoy abandoned Spain’s deficit goal for next year.

Joblessness in both countries may worsen as the recession deepens and rigid labor market laws are overhauled. Rajoy passed in February a plan to make it cheaper for employers to let workers go, while Italy gave companies more leeway to fire workers without fear of court-ordered reinstatements.

“High unemployment means a very dissatisfied electorate and makes it difficult to get stuff done,” said Padhraic Garvey, head of developed market debt at ING Groep NV in Amsterdam. “It makes it significantly more difficult to pass austerity measures and exacerbates a difficult situation.”

Rajoy’s Challenges

Rajoy probably will face further unrest if he’s forced to implement more budget cuts to meet ambitious deficit goals. His government has now pledged to reduce the shortfall to 5.3 percent of GDP in 2012 from 8.5 percent in 2011 and by more than 2 percentage points next year to get within the EU’s 3 percent limit. Despite a raft of austerity last year, the country achieved a deficit reduction of less than 1 percentage point.

Falling joblessness in Germany underscores the widening gap between the resilience of the euro-region’s largest economy and the so-called periphery. The nation’s adjusted jobless rate slipped in March to a two-decade low of 6.7 percent, according to the statistics office. While the 17-member euro-region economy will shrink 0.4 percent in 2012, Germany’s economy probably will grow 0.7 percent, according to economists’ forecasts compiled by Bloomberg.

“The divergence between Germany and the other economies is here to stay,” said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “It provides a structural reason for spreads to stay wider, regardless of what other progress is made on containing the crisis.”

Greek Elections

In Greece, where official data showed unemployment climbed to 21 percent in January, elections scheduled for May 6 may produce a hung parliament, raising questions about the nation’s ability to implement its austerity measures. The nation’s 2 percent bond due in February 2023 trades at about 25 cents on the euro.

In Portugal, where the government forecasts the unemployment rate will average 13.4 percent this year, up from 12.7 percent in 2011, Soares da Costa SGPS SA, Portugal’s third- biggest publicly traded construction company, said it’s expanding abroad and eliminating jobs at home, where it faces a slump in government infrastructure spending. 

“High and rising unemployment is likely to impact at a political level and may make the reforms more difficult to undertake,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “If the political desire to reform comes in to doubt, then the market wouldn’t like that. There’s good scope for the crisis to get worse in the near term, the economies are still on pretty shaky ground and there’s a lot of political risk.”

By Daniel Tilles at dtilles@bloomberg.net.

Eurozone unemployment hits new record

Unemployment is at the highest rate since the euro was launched in 1999

The jobless rate in the 17 countries that use the single currency was 10.4% in December, unchanged from November's figure which was revised up from 10.3%.

Some 16.5 million people were out of work in the eurozone in December, up 751,000 on the year before.

The highest unemployment rate remains in Spain (22.9%), while the lowest is in Austria (4.1%).

Unemployment has been rising throughout 2011, as the debt crisis in the region has continued. In December 2010, the unemployment rate in the euro area was 10%.



Investment delays
 
Guillaume Menuet, economist at Citigroup, said he expected the number of people out of work to increase throughout 2012.

"If you think about the direction of employment expectations that you see across various business surveys, the outlook for employment doesn't look particularly enticing, simply because the uncertainty is very high.

“Start Quote

Much energy and argument has been spent on this agreement. It is questionable, however, whether it will have much influence on the immediate crisis. ”

Gavin Hewitt BBC Europe editor

 

"In many cases you find firms continuing to delay investment projects. For those that are still making profits, hiring is being frozen, and for those which are under pressure to hit results or losing money, job losses are becoming the only solution that they have," he said. 

In the 27 EU countries, the unemployment rate was 9.9% in December, with 23.8 million people out of work. November's figure was also revised up from 9.8% to 9.9%.

The biggest increases over the past year were seen in Greece, Cyprus and Spain.

The largest falls took place in Estonia, Latvia and Lithuania.

Deteriorating situation

  The issue of jobs and economic growth was a key area for discussion at this week's summit of EU leaders in Brussels.

On Monday, figures showed that the Spanish economy shrank by 0.3% in the last quarter of 2011. It is now widely expected that Spain will enter recession in the first quarter of this year.

Also on Monday, France cut its growth forecast for this year to 0.5% from 1% "to take into account the deterioration of the economic situation".

At the Brussels summit, 25 of the 27 member states agreed to join a fiscal treaty, aimed at much closer co-ordination of budget policy across the EU to prevent excessive debts accumulating.

The UK and the Czech Republic did not sign up to it. UK Prime Minister David Cameron said he had "legal concerns" about the use of EU institutions in enforcing the treaty, while the Czechs cited "constitutional reasons" for their refusal.

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IMF - Lagarde’s Challenges

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Raghuram Rajan

CHICAGO – Now that the dust has settled over the selection of the International Monetary Fund’s managing director, the IMF can return to its core business of managing crises. Christine Lagarde, a competent and well-regarded technocrat, will have her hands full with three important challenges.

The first, and probably easiest, challenge is to restore the IMF’s public image. While the criminal case against Dominique Strauss-Kahn on sexual-assault charges now seems highly uncertain, the ensuing press focus on the IMF suggests an uncontrolled international bureaucracy with unlimited expense accounts, dominated by men with little sense of restraint.

Fortunately, the truth is more prosaic. Top IMF staff face strict limits on their allowable business expenses (no $3,000 per night hotel rooms, despite reports in the press), and are generally underpaid relative to private-sector executives with similar skills and experience.

The IMF, like many organizations where workers spend long trips together, has its share of intra-office romances. But the environment is professional, and not hostile to women. A previous incident in which Strauss-Kahn was let off lightly for an improper relationship with a subordinate clearly suggests that the Fund needs brighter lines for acceptable behavior and tougher punishment for transgressions. But other organizations have dealt with similar issues; the IMF needs to make the necessary changes, and, equally important, get the message out that the DSK incident was an aberration, not the tip of the proverbial iceberg.

Mess in Europe

The second, and perhaps most difficult, challenge facing Lagarde, is the mess in Europe, where the IMF has become overly entangled in eurozone politics. Typically, the IMF assesses whether a country, after undertaking reasonable belt-tightening measures, can service its debt – and lends only when it is satisfied that it can. The entire objective of IMF lending is to help finance the country while it makes adjustments and regains access to private borrowing. This also means that a country with too much debt should renegotiate it down before getting help from the IMF, thereby avoiding an unsustainable repayment burden.

Perhaps swayed by promises of eurozone financial support (and Europe’s desire to prevent default-fueled financial contagion from spreading to countries like Spain and possibly Italy), the IMF took a rosier view of debt sustainability in countries like Greece than it has in emerging markets. But this has not “helped” such countries, for the availability of soft credit from the eurozone or the Fund only enables a greater accumulation of debt.



Ultimately, debt can be repaid only if a country produces more than it spends. And the higher the debt, the less likely it is that the country will be able to achieve the mix of belt-tightening and growth that would enable it to generate the necessary surpluses. Delayed restructuring eventually means more painful restructuring – after many years of lost growth.

If troubled eurozone countries, especially Spain, start growing rapidly again, there is still a “muddle-through” outcome that might work. With too-big-to-save countries like Spain in the clear, the debt of highly-indebted peripheral countries like Greece could be written down through interest waivers, maturity extensions, and debt exchanges. The eurozone – and the European Union – could survive its fiscal crisis intact.

Significant haircut

But having failed to insist on an up-front restructuring, the IMF will face problems. With private investors reluctant to lend more or even to roll over existing debt, the bulk of Greek debt at the time of any restructuring (or whatever it is euphemistically called) will be from the official sector. How the resulting losses imposed on debt holders will be divided between the various eurozone institutions and the IMF is anyone’s guess. For the first time in its history, the Fund might have to take a significant “haircut” on its loans, and it will have to prepare its non-European shareholders for it.

 Being independent

A greater dilemma will emerge if the muddle-through strategy does not seem to be working. At some point, the IMF’s strategy, which should be focused on the distressed country’s citizens and its creditors, should depart from that of the eurozone, which is more willing to sacrifice individual countries’ interests for the larger interest of the monetary union. Lagarde’s challenge will be to chart a strategy for the IMF that is independent of the eurozone’s strategy, even though she has been intimately involved in formulating the latter.

The third challenge for Lagarde concerns the circumstances of her election. It is not inconceivable that a number of emerging-market countries will get into trouble in the next few years. Will the Fund require the tough policy changes it has demanded of countries in the past, or will Lagarde’s need to show that she is not biased towards Europe mean that future IMF interventions will become more expansive and less demanding? A kinder, gentler Fund is in no one’s interest, least of all the distressed countries and the world’s taxpayers.

Finally, there is a challenge that seems to be pressing, but is not. In her campaign for the position, Lagarde emphasized the need for diversity among the IMF’s top management. But what is really needed is the selection and promotion of the best people, regardless of national origin, sex, or race.

Clearly, the IMF’s existing culture and history will bias its selection and promotion of staff towards a certain type of person (for example, holders of PhDs from US universities). That commonality in backgrounds among IMF personnel allows the Fund to move fast in country rescues, not wasting time in endless debate. In the long run, more diversity is needed. But if it is attempted too quickly, in order to paper over the fact that a European is in charge once again, the Fund risks jeopardizing its key strength.

The IMF is perhaps the central global multilateral economic institution at a time when such institutions are needed more than ever. Lagarde arrives to lead it at a difficult time. We all have a stake in her success.

Raghuram Rajan, a former IMF chief economist, is a professor at the University of Chicago’s Booth School of Business.

The Economics Of Why American Soccer Lags Behind The World

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The U.S. Men's National soccer team opens its play in the 2010 World Cup against England in a much anticipated matchup Saturday, June 12 in Rustenburg, South Africa.  A rematch of 2 countries that met 60 years ago in group play at the 1950 World Cup in Brazil, and the site of perhaps the most glorious U.S. soccer victory of all time.

And though a victory over England in 2010 would not be the monumental upset it was in 1950, and though the American side during the summer of 2009 at the Confederations Cup beat 2008 European Cup champions Spain and led Brazil 2-0 before succumbing in the finals, U.S. soccer is still viewed as a second-class citizen by most soccer experts.


Brazil, Italy, Holland, Germany, Spain, Argentina, France and England are traditionally considered top tier soccer nations.  Most experts would rank the U.S. somewhere among the 10th to 20th best soccer playing nation in the world.

U.S. soccer has made tremendous strides since 1950.  Popular enough to sustain the North American Soccer League from 1968-1984.  Resilient enough to renew pro soccer with MLS starting in 1996, and the league has grown from 10 teams to 18 teams by the start of the 2011 season.  Internationally, we've qualified for 6 straight World Cup trips starting in 1990 after a 40 year hiatus.  And the U.S. will likely be awarded another World Cup in either 2018 or 2022 after successfully hosting the 1994 World Cup.

Despite all these positives, there are various economic explanations why the U.S. continues to languish behind the world soccer powers.  Namely, a lack of TV and corporate money in the U.S., 'first-mover advantages' and socioeconomic differences between the U.S. and many superior soccer playing nations.



TV and Corporate Money

Spaniard Pau Gasol of the LA Lakers plays in the NBA rather than Spain's top basketball league because there's more wealth and prestige in the NBA than he can find in any other basketball league in the world.  Similarly, Clint Dempsey and Tim Howard of the U.S. soccer team play their professional soccer in England because it has far more wealth and prestige than the MLS.

This difference in wealth and prestige stems from international differences in the way TV and corporate money is expended on soccer.  There is a domino effect that continues to hurt the visibility of American soccer leagues like MLS because lower revenue streams from media and corporate sponsorship deals hamstrings the league's ability to offer salaries that will attract the world's best players to America.

If fans aren't watching on TV, then ratings are lower.  If ratings are lower, then MLS can't garner the type of TV contracts that you see in the English Premiere League or the National Football League.  If ratings are lower, then MLS can't charge premium sponsorship and advertising rates.

With a paucity of TV and sponsor/ad revenue compared to other world soccer leagues and other American sports leagues, the league cannot afford to pay top world players in their prime the kind of dollars they can command in the top leagues in Germany, England, Italy, or Spain.

In American sports, the most lucrative playing careers in team sports have been and continue to be found in professional basketball, baseball, hockey, and football.  Since these sports yield a higher rate of return to the professional athlete in terms of a greater likelihood to make more money and not have to travel abroad to do so, these inherent realities - which owe themselves to the popularity of these sports and their subsequent ability to secure significant TV and corporate revenue - further depletes the potential talent base for American soccer since some top-flight amateur athletes may choose more lucrative sporting careers.

'First Mover' Advantages and Socioeconomic Factors

Soccer is England's game, much like hockey is Canada's game and pigskin football is America's game.  Going back to the Cambridge Rules drawn up at Trinity College in 1848 to help standardize the organized rules of 'football' across various English public schools, this highlights the significance and long-run power associated with the  'first mover advantage'.  It was England's sport first, and as such to this day, their nation lives and breathes soccer...and this is reflective in the broadcast rights fees and the corporate dollars the EPL can command.

The historical popularity of soccer in South America and other nations with lower per-capita income levels may owe itself to economic logistics.  Soccer is not an expensive game to play.  You need a ball.  You need space.  And sometimes not even that to grow a passion and skill for the sport.  Pele, often regarded as the best player ever and who came from humble beginnings, juggled oranges in the streets of Brazil as a boy.
For many lower income nations, most other sports are cost prohibitive either in terms of the simple logistics of playing the sport at the youth level (e.g. hockey, American football) or the infrastructural and organizational costs of player development, equipment and facilities and league administration.  As such, soccer is THE sport of many nations where the socioeconomics dictate that soccer is the most financially accessible option to a nation's residents.

Conversely, the U.S. has the wealth and infrastructure to sustain and support leagues in plenty of sports more historically native to North America.  And with more money to throw at players in these sports, there is arguably a financial incentive that may steer the best amateur athletes away from soccer.  In other nations, the main draw both financially and in terms of prestige is soccer.  Subsequently, other nations are more likely to attract their best athletes to the sport of soccer.

As a soccer enthusiast, I'm ever hopefully that the popularity and interest in soccer on a professional level in the U.S. will continue to grow, which is why the U.S. performance in the 2010 World Cup, and in particular their first match against England, is so important for promoting soccer to the casual American sports fan.
Because without higher TV rights fees and greater outlays from the corporate sector, it's hard to overcome first mover and socioeconomic factors which partially explain America's current 2nd to 3rd tier place in the world of soccer.

By Dr. Rishe is the Director of Sportsimpacts and an Associate Professor of Economics at Webster University in St. Louis, MO. 

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