Lies, damned lies, and statistics: Spanish and Greek youth unemployment much lower than reported

One of the most commonly cited Eurozone crisis statistics over the past several years has been youth unemployment, which in hard hit countries such as Spain and Greece has been reported to be as high as 50%.

In a recent post over at Project Syndicate Steven Hill dissects Eurostat's unemployment rate methodology and comes up with markedly different figures:

Unemployment estimates also are surprisingly misleading – a serious problem, considering that, together with GDP indicators, unemployment drives so much economic-policy debate. Outrageously high youth unemployment – supposedly near 50% in Spain and Greece, and more than 20% in the eurozone as a whole – makes headlines daily. But these numbers result from flawed methodology, making the situation appear far worse than it is. 

The problem stems from how unemployment is measured: The adult unemployment rate is calculated by dividing the number of unemployed individuals by all individuals in the labor force. So if the labor force comprises 200 workers, and 20 are unemployed, the unemployment rate is 10%. 

But the millions of young people who attend university or vocational training programs are not considered part of the labor force, because they are neither working nor looking for a job. In calculating youth unemployment, therefore, the same number of unemployed individuals is divided by a much smaller number, to reflect the smaller labor force, which makes the unemployment rate look a lot higher.

So what we have here is a simple division problem: the unemployment numerator is accurate, but the labor force denominator has been fudged.

What are the real youth unemployment figures in countries like Spain and Greece?

The youth unemployment ratio – the number of unemployed youth relative to the total population aged 16-24 – is a far more meaningful indicator than the youth unemployment rate. Eurostat, the European Union’s statistical agency, calculates youth unemployment using both methodologies, but only the flawed indicator is widely reported, despite major discrepancies. For example, Spain’s 48.9% youth unemployment rate implies significantly worse conditions for young people than its 19% youth unemployment ratio. Likewise, Greece’s rate is 49.3%, but its ratio is only 13%. And the eurozone-wide rate of 20.8% far exceeds the 8.7% ratio.

Certainly these much lower youth unemployment figures are still a matter for serious concern. And as Hill notes later in his post it is likely that at least a significant portion of young people who are in school are there because they cannot find work.

There is, however, a substantive difference between the 50% shock headline figures and the real picture of youth unemployment, and this difference may explain why we have not seen a full-on revolution in countries like Greece or Spain (at least not yet).

The final question is why has the media only reported the much larger youth unemployment figures and not the arguably more meaningful, lower youth unemployment ratio? Certainly the larger figure is much more sensational and attention grabbing.

At the risk of sounding conspiratorial, another way of asking this question is who benefits by reporting the larger figure? Undoubtedly larger figures aid the narrative of the pro-bailout and pro-stimulus, anti-austerity contingent. 50% youth unemployment sounds pretty drastic, and drastic times call for drastic measures.

As they say, "never waste a good crisis".

Video: Raghuram Rajan, Niall Ferguson, etc. on The Future of Capitalism

This video from the Milken Institute Conference unfortunately appears to begin after the panel has already begun and cuts abruptly, but still features a very good discussion of economic issues in the U.S., Asia, and Europe.

Greece Just Publicly Threatened Its Trump Card

Greece just decided to start 2012 off by significantly upping the ante:

"The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," spokesman Pantelis Kapsis told Skai TV.

 Here's my previous piece explaining why in the European sovereign debt crisis Greece holds all the cards.

Clarifying What Is Meant By 'Lender of Last Resort'

As the European debt crisis continues to worsen there are growing calls for the European Central Bank to purchase ever greater quantities of Italian and other troubled sovereign debt. Berkeley Professor Brad DeLong recently wrote a widely discussed piece arguing that the ECB is failing in its central banking duty as 'Lender of last resort'. But is it?

Professor DeLong makes some good points, particularly about the importance of establishing credibility with the market. However, he fails to differentiate between a central bank serving as a lender of last resort to the banking system versus a lender of last resort to sovereign countries. So far as I know (central bank operations are often murky by design) the ECB has continued to serve as the former but has resisted becoming the latter. There is a big difference between the two so this is an important omission by Professor DeLong.

With respect to the European banks, the ECB has opened and accessed U.S. dollar swap lines with the New York Federal Reserve Bank while also providing certain "unlimited" lending facilities to European banks. In short, the ECB is in fact playing the role of 'Lender of last resort' to Europe's banks. However, as DeLong notes, the ECB has only purchased European sovereign debt in limited quantities. How come?

The Germans get blamed for the ECB's spendthrift ways, with the not-so-distant memories of the Weimar hyperinflation still weighing on Teutonic minds (or so the usual armchair-Freudian analysis goes). But there is some prima facie evidence for this hypothesis: even though the ECB has (so far) not chosen to crank up the printing press full-bore two German ECB board members have resigned in the past year. The most recent, Juergen Stark, publicly stated that his reason for quitting was the ECB's resumption of Italian and Spanish sovereign debt purchases.

While the ECB may continue to hold back for now I suspect that if things get extremely ugly it will in fact print a much greater quantity of money than it has to date to bail the Eurozone out of its debt problem. If this happens euro bulls beware.

The other alternative is for the proper lender of last resort to sovereign countries -- the IMF -- to step in. The IMF was in fact created precisely for situations like the current Eurozone debt crisis. Given this you might be wondering why the experts, in near unanimity, are instead pointing towards the ECB? The answer, in short, is because the ECB has a printing press and the IMF (for now) does not.

Other countries, such as China, do have the funds to bolster the IMF to bailout Europe. But they'll want something in return, such as a greater voting share on the IMF's Board. This is an unappealing prospect to the U.S. and (in particular) Europe, which has since the IMF's inception held a perennial lock on the top job at the Fund. And so in the minds of many that leaves only the ECB.

World's Most Dangerous Banks and Their Host Countries

Below is the Financial Stability Board's list (by host country) of systemically important financial institutions (SIFIs), alternatively known as the 29 banks which are simply Too Big to Fail.

Twelve different countries are home to these 29 banks. Half of those countries host just one Too Big to Fail institution, and the other half host anywhere from two (Germany and Switzerland) to the U.S.'s eight.

Continue reading the full article at SeekingAlpha here.

Photo of the Day: Angela Merkel Sizes Up the Eurozone Bailout

(click to enlarge)

h/t Barry

The Italian Job: An 'Explosion in Slow Motion'

While much of the damage control attention in the rapidly escalating Italian crisis has fallen on the ECB's purchases of Italian debt, German Profressor Hans-Werner Sinn points out how the Bundesbank (and other European central banks) have been conscripted into lending a neighborly hand:

The ECB directed the central banks of all Eurozone members to buy huge quantities of Italian government bonds during the crisis. While the national central banks have not revealed how much they bought, the aggregate stock of all government bonds purchased rose from €74 billion ($102 billion) on August 4, to €165 billion this month. Most of this increase was probably used to purchase Italian government bonds. 

The German Bundesbank, which was forced to buy most of the bonds, strongly opposed the program, but was unable to stop it. In response, ECB Chief Economist Jürgen Stark resigned. He followed Bundesbank President Axel Weber, who had resigned in February because of the earlier bond repurchases. Meanwhile, the new Bundesbank president, Jens Weidmann, openly objects to the program, while German President Christian Wulff has publicly accused the ECB of circumventing the Maastricht Treaty.

Not to be outdone the Banca d’Italia has started printing money:

But the bond purchases are just the tip of the iceberg. Equally important, but largely unknown, is the fact that the Banca d’Italia has resorted to the printing press to cover Italy’s gigantic balance of payments deficit. The extra money printing and lending, as measured by the so-called Target deficit, effectively means drawing a credit from the ECB. 

This credit replaces the private capital imports that had hitherto financed the country’s net purchases of foreign goods, but which dried up because of the crisis, and it finances a capital flight, i.e. the purchase of foreign assets. The ECB in turn draws the Target credit from the respective national central bank to which the money is flowing and which therefore has to accept a reduction in its scope for issuing refinancing credit. 

Until July, only Greece, Ireland, Portugal, and Spain had drawn Target credit, for a combined total of €330 billion. Italy was stable and did not seem to need the printing press to solve its financial problems. No longer. 

In August alone, Italy’s central bank drew €40 billion in Target credit, and it probably drew roughly another €50 billion in September, when the Bundesbank’s Target loans to the ECB system increased by €59 billion (after a €47-billion hike in August). This is the highest Target loan ever drawn from the Bundesbank in a single month, and in all likelihood it went primarily to Italy.

Full commentary here. 

Graphic: European Sovereign Debt Crisis - It's All Connected

This is a BIG graphic. The original NY Times version, which is easier to view, can be found here, with the interactive version here.

(click to enlarge)

Video: Micheal Lewis on Charlie Rose Discussing the Sovereign Debt Crisis

In addition to sovereign debt Michael covers the movie Moneyball, the ongoing Wall St. Occupation, and discusses his style of writing.

A link to the video interview is here.

Also, here is a roundup of the latest reviews of his new book, Boomerang, about the sovereign debt crisis. 

Review Roundup for Michael Lewis' New Book - Boomerang: Travels in the New Third World

Below are a list of reviews published so far. And here are links to all the chapters in the book, which were previously published in Vanity Fair (except the book's preface on Kyle Bass).

NY Times

Telegraph

Forbes

Washington Post

Amazon customers

Video: Carmen Reinhart on a Decade of Debt

Here is a link to audio only versions of Carmen's presentation and the Q&A.

Video: Soros (Best Case Scenario) 2-3 European Countries Default/Leave Euro

And oh btw, the U.S. has probably already entered a double-dip recession.

But the good news, according to Soros, is that government authorities have learned from Lehman and will bail out Too Big to Fail firms when the system collapses again. In other words, the so-called 'Bernanke put' is not kaput.

How many euro area finance ministers does it take to change a light bulb?

None – there is nothing wrong with the light bulb.

From the Irish Times.

Michael Lewis on Germany & the Eurozone

The latest and final instalment in a series of what author Michael Lewis has described as 'Euopean financial disaster tourism' articles he's penning for Vanity Fair can be found here. This latest article focuses on Germany (the previous two covered Greece and Ireland - google them or click on 'Michael Lewis' tag below to get the link).

The Germany articles also features an accompanying interview with Lewis, where 'Europe's least welcome tourist' discusses the problems with the broader Eurozone:

VF Daily: Where did the euro go wrong? 

Lewis: At its conception. They glued together a bunch of countries and cultures that didn’t really belong together in the same currency. So if you put Germany together with Greece in a single currency, it’s a little like watching an Olympic sprinter and a fat old man running a three-legged race. The Greeks will never be as productive as the Germans, and the Germans will never be as unproductive as the Greeks. So if they’re in the same currency—unless the Greeks simply up and move to Germany to work for the Germans—it implies a lifetime of transfers from Germany to Greece. 

VF Daily: Greece was allowed a partial default this week, to the tune of $157 billion, despite the E.C.B.’s disapproval. This measure seems like a Band-Aid, though. Can we expect something much larger to happen, or do presidents and prime ministers just enjoy getting together to argue every six months? 

Lewis: The Germans are basically calling the shots here, because they’re the only ones who can afford to pay the bill. My impression is that the German people do not want to pay it, but the German leadership does not want to be labeled as the people who destroyed the euro. So the way Angela Merkel is playing it is to tell the German people what they want to hear until the moment another crisis occurs, and then she goes into parliament and says, “I need this little check to get us through this rough patch, or you will be responsible for the disintegration of Europe.” What she doesn’t ever come away with, however, is a commitment for fiscal union. She doesn’t get Germany agreeing to underwrite euro bonds—to take all the debt of the southern countries. 

VF Daily: Well, it would be political suicide, right? 

Lewis: She may have already committed political suicide. German people are increasingly unhappy with how she has handled the crisis. I don’t think that the German people are going to go all-in. The step that they would need to take is much more dramatic than this Band-Aid.

Updated: Greece to Engage in 'Selective' or 'Restricted' Default

Eurogroup head Jean-Claude Juncker

The undeniable fact that a Greek credit event was imminent was prognosticated here in late May. The situation on the ground in Greece, the lack of political will in the Eurozone, and the simple arithmetic all made kicking the Greek debt can much further down the road simply improbable.

Now, at last, we have all but final confirmation from the horse's mouth of what many since last year have known all along: Greece will default.

What happens next?

This is much more difficult to predict and will depend on just how exposed fragile financial institutions are to the ripple effects of default, and how credible the new package which accompanies Greece's default. If contagion spreads uncontrollably to Italy and/or Spain, look out below!

Update: On the newly announced Eurozone bailout program, economist Willem Buiter has a nice quote: “The EFSF has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo. It needs to be increased in size urgently.” 

The failure of Europe's leaders to increase the size of the bailout fund speaks to the lack of political appetite in Germany and other northern European countries to support further bailouts, as well as a failure to understand just how big Europe's debt problem is.

Any predictions on the half-life of the latest can-kicking measure before there's blood in the water again?

Has the ECB Left the Italian Rearguard Wide Open to Speculative Attack?

During the ongoing debt saga in Europe's periphery, the European Central Bank (ECB) has actually had some success fending off speculative attacks. Hedge fund manager Hugh Hendry, for one, sounded like he was licking his wounds when he remarked last year that trying to short Europe had in effect become too 'expensive'.

The ECB's working assumption has always been that preventing the spread of contagion to Spain was of paramount importance. While it's true that Italy has most always been included when discussing the PIIGS debt problem, there was a sense that because Italian debt is largely held domestically by Italians (like Japan's situation, although not as high as their 95% domestic holding level) that the risks of unstable debt dynamics there were relatively low.

All that apparently changed suddenly on Friday as Italian bond spreads widened and, perhaps even more troubling, key Italian bank stocks plunged. As Italian regulators race to curb short selling, today both Italy's largest bank, UniCredit, and Intesa Sanpaolo are limit down, which triggered a halt to trading in their shares.

Has the ECB in its successful efforts to prevent financial contagion from spreading to Spain left Italy vulnerable to speculative attack? Or is Italy's rolling-over merely a sign of the realization on the part of government officials that they simply can't go on playing the kick-the-can down the road game indefinitely? Treasury Secretary Geither seemed to concede as much during a Sunday morning interview on Meet the Press.

For how bad things could get if Italy implodes (the country is home of the world's third largest bond market after the U.S.'s and Japan's) the below chart provides some perspective.

Update: There are reports that today (Tuesday) the Italian central bank, acting perhaps on the behalf of the ECB, has been buying Italian debt, and that the ECB will need to step in again for Italy's debt auction on Thursday or it will fail.

Every time European central banks step in to purchase sovereign debt the value of the euro will ratchet down accordingly.

Chart of the Day: Generation U

Perhaps its time to rename Gen Y as Gen U, as in Generation Unemployed.

Not surprisingly, the PIIGS occupy five of the top seven spots in this primarily European country sample. Chronically unemployed young males are often a key ingredient in social unrest and revolution.

Source: The Economist

Roubini on the Eurozone: 'Messy marriages lead to messy divorces'

Nouriel Roubini

Some of the other choice quotes:

• 'when Greece folds like a wet gyro, and it will...'
• 'the politicians at these meetings will not be the same ones at a similar meeting in two years'
• 'but if the marriage doesn’t work, even the threat of a messy divorce cannot keep couples together that are not a long-term match'
• 'Let me suggest to my fellow US citizens that you really pay attention to this. If you think that we can somehow avoid making difficult choices by kicking the can down the road, watch the European theater. And coming to a theater near you in a few years will be a real Japanese monster movie. Godzilla on steroids.'

Roubini's full analysis on why Greece and other PIIGS will ultimately be left with no choice but to exit the euro and return to their respective currencies (e.g., the Greek drachma) here.

Rogoff: Germany Must Construct a 'Firewall' Around Spanish and Italian Debt

Full post here; graphic below of what Germany and the 'troika' can afford.

Video: Niall Ferguson on Trichet's Call for a Centralized Eurozone Finance Ministry

Trichet's latest move smacks of "desperation" and may hint at just how perilous the ECB's balance sheet is with respect to its European periphery (aka PIIGS) debt holdings.

 Full video here.