Daily Archives: May 4, 2012

Friday’s US jobs data sound a warning that should be heard well beyond economists and market watchers.

With just 115,000 new jobs in April, the US economy is not creating enough employment opportunities to make a dent in the 12.5m jobless Americans in the labour force, of which a stunning 5.1m are long-term unemployed. Moreover, the disappointing monthly number managed to fall short of analysts’ massively subdued consensus expectation of 160,000, highlighting yet again the unusual sluggishness of the labour market.

Americans that do have jobs are experiencing no wage growth. Measures for both April hourly earnings and hours worked came in flat, confirming that purchasing power for most workers is failing to keep up with inflation. This is consistent with earlier data on the personal savings rate, which has fallen to levels that suggest a quickly eroding precautionary cash cushion for too many Americans.

And then there is the labor participation rate which measures the number of adults in the labor force. This declined yet again and, at 63.6 per cent, is at a level last seen in 1981. In addition to highlighting the secular headwinds to income and wealth generation, this makes a mockery of the published unemployment rate of 8.1 per cent —  a number that would be over 10 per cent if discouraged Americans had not dropped out of the labour force in their millions over the last few years.

The economic implications are clear. On current trends, consumption (by far the largest component of gross domestic product) is in no position to be a sufficiently dynamic engine of growth  – and this at a time of considerable headwinds emanating from a recession-hit Europe. Moreover, the balance of risks is tilted to the downside given a potential year-end “fiscal cliff” that, absent proper political reactions, would suck out some 4 per cent of GDP in purchasing power, and do so in a disorderly fashion.

Friday’s disappointing jobs report will also worsen Washington’s highly polarised politics. Already, initial reaction from there suggest that, rather than act as a catalyst to bring the political class together to address a persistent national problem, the numbers are fueling conflicting political narratives and greater polarisation – thereby reducing further the probability of any timely convergence towards the type of common analysis and common vision that are needed.

With virtually all government entities essentially paralysed by political gridlock, the Federal Reserve will soon confront yet another lose-lose policy dilemma. Does it renew its unconventional activism using inevitably blunt tools that involve a growing set of collateral damage and intended consequences; or does it stick to the sidelines and watch the economy weaken further in the summer?

And then there are the social consequences. Friday’s numbers speak to the growing stress on America’s already-stretched safety nets, as well as its growing income inequality. It also points to the possibility (though, fortunately, not yet a probability) of a lost generation. With teenage joblessness stuck at 25 per cent, too many young people face the risk of going from being unemployed to becoming unemployable.

To many, this analysis will seem overly downbeat. It is not. It is a reflection of a multi-faceted unemployment crisis that politicians, both in America and Europe, are failing to comprehend, unite around, and respond to.

Let us hope that this latest set of data becomes a call for action. If not, I worry greatly that facts on the ground will unfortunately warrant future analyses to be even more disheartening.

Here’s how to start an argument in Britain. Suggest that far from being inherently flawed, the euro is fixable and could succeed in the long run. Suggest Britain should even consider joining it at some point. This last idea is a proposition with which the majority of British people disagree, strongly. I know this because the think-tank Policy Network has today published new polling that tells you that eight in 10 British people believe Britain should never join the euro, in any circumstances, even if it costs Britain influence in Europe. I am going respectfully to disagree. Why?

The results of the Policy Network polling suggest that over half of the British people support membership of the European Union, only as it is now or as a looser free trade area. A third would simply leave. With the exception of leaving the EU, none of these choices are actually available to Britain. The EU, or a large part of it, is about to enter a phase of further evolution, based on closer integration, because the survival of the eurozone depends on it. Britain’s choice is how it responds to this change, not a fantasy version of British policy in which we define the Europe we want and the terms of our membership.

Against a backdrop of crisis, we are busy patting ourselves on the back for not joining the European single currency in the 1990s. Plenty of investors are betting on the total failure of the eurozone under the pressure of the sovereign debt crisis, and they may well be right. But the political will to preserve the currency bloc is intensely strong incontinental Europe. Indeed the current crisis may well provoke the institutional and political innovation that was lacking in the eurozone’s design a decade ago.

So whatever our current scepticism, it is worth contemplating what a revived and salvaged Eurozone might mean for Britain. Saving the single currency is about to push the 17 states of the eurozone into attempting an ambitious new level of political integration. The UK government itself argues that the eurozone’s future now depends on it following what UK Chancellor George Osborne calls “the remorseless logic” of fiscal and political integration.

The eurozone, to survive, has no alternative but to try to follow that logic. Most other EU states, for reasons that are a mix of conviction and strategic calculus, are likely to follow. The obstacles to this process are legion, but that does not mean it is bound to fail. Nor is it inconceivable that Britain could find itself a decade from now the only state – or at least the only large state – in the EU but outside the Eurozone as a matter of policy. The single currency and the currency zone will be the defining criteria of ‘core’ Europe. Britain would be a European annex. The EU will have been rebooted, with the UK on the outside.

British public opinion, at the moment, seems sanguine about this. It is true that at first it may not matter too much. Cooperation on defence, foreign and energy policy will have their own centres of gravity that will not at first be anchored in the eurozone. But, as the core group increasingly caucuses on questions of economic governance without us, it will matter. As Norway does now, we will have free trade with these states, but not on terms we have had much of a hand in writing.

For British business and the City there will be a short and long-term price attached to being outside the single currency, intransaction costs, exchange rate volatility, liquidity and influence over single market rule-making. You sometimes hear people confidently describe a future Britain as Hong Kong to Europe’s China. It is worth remembering that Hong Kong’s two centuries of strength and influence were a function of China’s weakness and insularity. For all its problems, Europe hardly fits that picture.

For 30  years, the UK’s European policy has been based on the principle of supporting the widening of the EU as a check on its deepening. We can see now that the creation of EMU in the 1990s meant that this policy was living on borrowed time. Europe may be about to start a new political journey without us. That journey may stall. It may be abandoned. There must be a good chance of both. But it may not. In our relief at avoiding the current euro debacle, we nevertheless need to recognise that ruling out ever joining a repaired single currency as a matter of principle is likely to be the same as choosing a peripheral role in the development of a European political union. We should not do this lightly.

Why not? Because I believe that the facts of life for Britain in a globalised economy are European. I believe it is not just our biggest market, but also our intellectual and political hinterland. It is our only prospect of sustained global influence in a world of continental-sized powers. The majority of British people who cannot imagine a future for Britain outside the EU need to think and debate about what this may mean. If the eurozone survives as part of a re-shaped, more integrated Europe, I believe that none of the political parties, by themselves, will be able to re-establish a national consensus and that we will need a referendum to do so instead. This will not come soon but the stakes are high. Let’s get ready for the national debate.

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