by Kyle Colona on May 4, 2012
As the sovereign debt crisis continues to linger, the German Chancellor has played a pivotal role in leading the European Union. At her direction, the faltering sovereign nations have been pushed into implementing stringent austerity measures in order to qualify for bailouts by the European Central Bank.
Meanwhile the debt of these nations has repeatedly been restructured and the bond holders (mostly large banks in the EU) have been forced to take “haircuts” on their debt holdings. One result of these measures has been a wave of protests by the euro people who have been affected by the austerity measures – particularly in Greece.
Moreover, there have also been political transformations in Portugal, Spain, Greece, as well as Italy. Now, according to BusinessWeek, the latest news out of Nuremberg is that the number of unemployed Germans rose unexpectedly in April. The story notes that this could have far reaching implications not only for Germany but also for the rest of Europe.
Of course, an uptick in unemployment is a yellow flag since Germany has not had to implement austerity measures. This is so in part because the country has benefitted from trade imbalances that have fueled economic growth and produced enough tax revenue that have head spending cuts off at the pass.
But if the German economy weakens the rest of the EU would be injured by decreasing Germany’s demand for their products. And the question remains as to whether Chancellor Merkel will implement spending cuts as this runs the risk of triggering a contraction according to some economists.
In the meantime, Germany’s economy remains “robust” while the unemployment rate of 6.8% is still a two-decade low. That being said the number of people out of work increased by 19,000, to 2.87 million according to the Federal Labor Agency in Nuremberg.
Of course, these numbers would be a welcome sign here in the US where the unemployment rate is still above 8% and will probably hover at that level through the rest of the year. But for the ten year period leading into the financial crisis, the rate held steady at about 5% or less.
And the overarching problem facing both nations is that companies are holding off hiring. In Germany’s case it’s a matter of lingering uncertainty as to whether the debt crisis will ultimately be resolved. While the problem in the US remains tight credit markets that are hampering small businesses from growing and adding workers.
In the final analysis if economic growth is not restored to the sovereigns, the possibility of a recession in the euro zone could undermine the aforementioned trade balances as demand for German products will slide and pull the Germany economy down.