Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Europe's Job Market Is Splitting in Half
Transcript
- Lucas: So the US jobs report on Thursday was a genuine stunner — just 57,000 payrolls added in June, against expectations of close to 200,000. But what caught my eye even more was the labor force participation rate hitting its lowest level in fifty years, outside of the Covid era. And I think this connects directly to something happening in Europe right now. Luna: Are you talking about the European participation numbers? Because I saw a stat yesterday that the eurozone's participation rate has actually been falling too, even in countries where the headline unemployment rate looks fine. Lucas: Exactly. The headline numbers look decent — eurozone unemployment is near historic lows. But underneath, the labor market is quietly splitting in half. And if walking through the economy with us has made something click for you, a couple of dollars a month is genuinely what keeps these shows going. You can find us at buy me a coffee dot com slash fexingo. If you've gotten something out of them, it makes a real difference. Luna: Yeah, it's small amounts adding up. And it keeps the whole thing ad-free, which I love. Lucas: Right. So back to the split. Let's look at the Vanguard FTSE Europe ETF, ticker V-G-K. It's up 2.5 percent in the last five days. The iShares MSCI Eurozone ETF, E-Z-U, up 2.2 percent. Markets are pricing in a rosy scenario. But the labor data tells a very different story. Luna: You're saying the rally is disconnected from the jobs picture? Lucas: Partly, yes. Take Germany and France. Both have seen their labor force participation rates decline over the past year. In Germany, it's dropped about half a percentage point. In France, it's even more pronounced. These are not economies that should be shedding workers or seeing people give up looking. They're supposed to be the core. Luna: But then you have Spain and Italy going the other way. Spain's participation rate has actually ticked up. And its unemployment, while still high, has been falling steadily. Lucas: Exactly. And that's the split. Southern Europe is seeing genuine labor market improvement. The iShares MSCI Italy ETF, e w i, is up 3.4 percent in the last five days. The Spain ETF, e w p, up 1.7 percent. Those gains are partly justified by real job growth. Meanwhile, Germany's e w g is up 4.1 percent, but that's more about sentiment and rate cut hopes than actual employment strength. Luna: So what's driving the divergence? Is it just the ECB's rate cuts helping the periphery more? Lucas: That's part of it. The ECB has cut rates several times this year. Lower rates reduce borrowing costs for banks in Spain and Italy more than in Germany, because those economies have more small and medium enterprises that rely on bank lending. But there's also a structural story. Germany's export sector is still hurting from the strong dollar hangover and weaker Chinese demand. That weighs on manufacturing jobs. Luna: And France has its own political uncertainty. Lagarde recently said she's mulling French politics as she considers an early exit. That can't help business confidence. Lucas: Right. So you have a core that's stagnating on jobs, and a periphery that's catching up. But there's a worrying side to this. The overall labor force participation rate in the eurozone is falling. People are dropping out. And that's not just retirees — it's prime-age workers who are giving up. Luna: That's the part that reminds me of the US trend. The US participation rate fell again in June. If the economy is growing at 2.1 percent annualised, why aren't more people working or looking for work? Lucas: Because the growth isn't translating into broad-based hiring. In the eurozone, a lot of the GDP growth is coming from services and a rebound in tourism. That creates some jobs, but they're often lower productivity, lower wage. And the industrial sector, which traditionally provided stable middle-class employment, is still shedding. Luna: So the two-speed economy isn't just north-south. It's also services versus manufacturing. Lucas: Exactly. And that has implications for consumer confidence. If you're in a manufacturing job in Bavaria that's at risk, you're not going to spend even if rates are lower. But if you're in a hotel in Barcelona that's hiring, you might feel okay. That's why the eurozone consumer confidence recovery is so uneven. Some regions are seeing a real pickup, others are still cautious. Luna: And the ECB is caught in the middle. They cut rates to stimulate, but if the labor market is structurally weak in the core, monetary policy might not be enough. Lucas: Right. The ECB's own data shows that bank lending to businesses in Germany actually contracted in May, despite lower rates. Meanwhile, lending in Spain grew. So the rate cuts are working where the banking system is more dependent on them, but not where the problem is really a demand issue. Luna: So what should we watch for in the coming months? Is this split going to widen? Lucas: I think it will, unless we see a turnaround in global trade. The EU trade-weighted euro is still relatively strong, around 1.14 per dollar. That's not helping exporters. And the US economy is slowing — the June jobs report was a clear warning. If US demand weakens further, Germany's export machine will struggle even more. Luna: But southern Europe is less exposed to that, so they might continue to outperform. Lucas: Exactly. And that's the key takeaway: the eurozone labor market is no longer a single story. Investors who just look at the aggregate unemployment rate are missing the real picture. You have to look at participation, at sectoral breakdowns, at regional data. The VGK and EZU ETFs might be moving higher, but beneath the surface, there are two very different economies. Luna: And for policymakers, the challenge is that one-size-fits-all monetary policy doesn't address the structural issues in the core. Fiscal policy might need to play a bigger role. Lucas: Right. But with the new fiscal rules and defense spending pressures, there's not much room. So we could be stuck with this split for a while. The question is whether it's a temporary divergence or a permanent realignment of the eurozone labor market. I'd say it's too early to call it permanent, but the trends are definitely pointing that way. Luna: Well, we'll keep watching. Thanks for walking through this with us.