The reason why this was not a "real" recovery

I don’t know if mood swings were that common during the Great Depression but during the present depression mood swings are so dramatic that they can drive people crazy. Until a couple of months ago all we were hearing about was how the global recovery was more robust than we thought. Guess what, now we have swung to the other extreme end of the mood spectrum were only doom seems imminent.

Of course, truth is that the recovery was never robust and it was at best something superficial, a mere “upwards correction” to borrow a market term. A statistical hiccup if you prefer. I have written about this in the past (here, here and here).

Lately, I was thinking about long term unemployment and how catastrophic and destabilizing it can become for a country’s society and economy. It is no secret that long-term unemployment is a curse, that erodes people’s skills and self-respect and ultimately any sense or capability of self-preservation. 

In order to have a better look I plotted long term unemployment’s change between 2007 and 2010 along with change in GDP (a year before the crisis’ breakout and a year after that). Here’s the scatter plot.

source: Eurostat

These are panel data for the EU countries, not for the entire bloc though, since for some of them such data were not available.

As you can see, bar for 5 countries (out of which for 2 of them the decrease was negligible), long-term unemployment increased during this last “recovery”. 

In my book, one of the distinguishing features of an actual recovery is whether long-term unemployment decreases. It serves as an indicator of the momentum of any expansionary forces at work, since the economy has the strength to re-employ workers left redundant by defunct sectors (in most cases). A sign that the economy is healthy and can dodge any obstacles.

Even in the post 2001 recovery, that was not without strains, long-term unemployment decreased. Back then the heavy lifting, in picking up workers left jobless from the de-industrialization trend at work in the Euro Area, was done by low-level services jobs and construction. Could the housing booms that took place in a lot of Euro Area countries have been the region’s last resort in employing “unskilled” (by that I don’t mean to be disrespectful to anyone) workers?

source: Eurostat

As you can see at the chart, in some countries, long-term unemployment increased during this period. These were all eastern European countries, which in order to transform their economies from the centrally-planned model into the free-market one, had to endure some years of intense pain, so that the structure of their economies could adjust to the new reality. This process was totally different from what was happening in the rest of EU, hence they are kind of an outlier. On the contrary, 2 out of 3 countries, where long-term unemployment decreased significantly during the present “recovery” were from that bloc (Poland and Romania). I guess what goes around comes around.

I am not known to be optimistic, more like the exact opposite, but for what it’s worth, I can’t see any sector being ready to step in and absorb any future jobless workers coming potentially from the services sector, the financial sector or even the government sector if things get ugly in the Euro Area…