The Eurozone was one of the hardest-hit parts of the world during the 2008-2009 Great Financial Crisis. As the crisis spread throughout the developed and emerging markets, the unemployment rate rose dramatically.
Moreover, while other countries had a chance to put their house in order, the European Union faced another dramatic encounter – the Greek sovereign debt crisis. As such, 2012-2013 marked one of the highest unemployment rates in the European Union history, both among young people and in total.
Mario Draghi’s Legacy in Danger
Mario Draghi’s ECB presidency remains in the history books as the eight-years period when the ECB did not raise the rates once. You have to remember that this was before the coronavirus crisis as Draghi’s term ended in November 2019.
At a time when the Fed rose the rates above 2%, the ECB chose to do nothing. Just the opposite – it kept the deposit facility rate below zero and the other rates (marginal lending facility and key interest rate close to zero).
However Draghi often mentioned during his two terms that the unemployment rate dropping dramatically is a sign that the ECB policies do work. Indeed, more work was available in the European Union, and under Draghi’s term, the unemployment rate dropped to 6% from 12% in total. Even the youth unemployment rate dropped significantly.
Now they are both at risk.
Last August saw the unemployment rate in the European Union rise for the fifth month in a row. More precisely, almost 15.6 million people were out of work in the European Union. When compared to April, another 1.5 million people lost their jobs. The youth unemployment rate is back above 17.6%. But keep in mind that these are average numbers, in the sense that they present the data for all countries members of the European Union.
In some parts of the union, things are better. However some others remain worse. For instance, in Spain, it goes over 40%. In the meantime, Eurozone government deficits have exploded as a result of the COVID-19 crisis. They reached a total of EUR450 billion or around 5% of the Eurozone GDP. And are on the rise, the more the crisis deepens.
For the common currency, many voices argue that we should not worry about the deficit in such times. Even Fed’s Powell yesterday said that the United States’ deficit should come in second place now.
Why? The focus should be on jobs. First, get your house in order by creating jobs, and then the economy will heal naturally. This is what Draghi’s focus was. Unfortunately, an unprecedented crisis spoiled everything. Time for Lagarde to continue on Draghi’s work?