The ugly truth about the European economic mess is there are no jobs for young people, not only because the wrinkly set is working longer as retirement ages are lifted to the point you can consider a new career at 65, but mostly because there is no growth to speak of. So what is today’s European jobs summit in Paris going to accomplish?
With growth so anemic, and growth-killing austerity measures still alive and well, the answer is: Not much other than tinkering.
If growth were above 2 per cent, the young might have a fighting chance. It is not. The 17-country euro zone will finish the year with a 0.4 per cent contraction and expand by only 1.1 per cent in 2014. ING’s forecast for 2015 is for 1.5 per cent growth in the euro zone, still insufficient to get the jobs machine rolling. Some of the euro zone economies, among them Italy, Spain, Greece and the Netherlands, will see growth rates well below the euro zone average next year.
Youth jobless rates (under age 25) are so high on the euro zone’s Mediterranean frontier that it’s a miracle entire cities have not gone up in smoke (though Athens almost did on a few rather violent occasions in 2011 and 2012).
In Italy, the youth jobless figure in September was a record 40.4 per cent, prompting prime minister Enrico Letta to call unemployment his country’s “true nightmare.” In Spain and Greece, the youth jobless rate approaches an astonishing 60 per cent. In the wider European Union, the figure is 23.5 per cent; in the euro zone, it is 24.1 per cent. Even in some of the healthier economics, the youth jobless figures are a disaster. In France, it’s 26 per cent, up from 23 per cent in 2011.
The seemingly endless jobs summits are not working. The last one, in Berlin in July, pledged some €6-billion ($8-billion U.S.) over two years to address the youth unemployment crisis. It sound like a lot, but given the size of the problem it’s an exceedingly thin layer of honey over a big piece of burnt toast. The goal of the Paris summit is not to necessarily to find more money – there is none – but to put some flesh on the initiative outlined in Berlin. One measure would see a guarantee job retraining for every youth who has been out of a job for more than four months.
Creating jobs in the millions will require more than tinkering; it will require a revolution through the economic overhauls of hard-hit countries to free up markets, break professional guilds, greatly reduce employer taxes and unravel the bureaucratic knots that make it expensive and laborious to launch a business. In Italy, it takes dozens of permits to open a corner store. Even worse is the tax system, which wallops employers when their business reaches 15 employees.
Too bad the will to shake up the system is dying, thanks to falling sovereign yields. On Tuesday, Italy sold one-year bonds at a record low. The yield on its 10-year bonds has fallen by three percentage points, to about 4 per cent, since the height of the debt crisis in 2011 and 2012. The yields fell not because Italy, Spain and the other struggling countries cleaned up their fiscal and competitive acts, but because the European Central Bank last year promised to backstop the bonds of any country that was in danger of getting shut out of the debt markets because of rising yields. With yields falling, the incentive for governments to make their economies more competitive, and thus able to generate jobs, is falling away – the market pressure for reform is gone.
Germany needs to do its bit too. An export machine, it is running a massive current account surplus. Stoking up domestic demand would go a long way to revive the wider European economy. While Germany’s current account surplus is shrinking somewhat, it is not shrinking fast enough to put a dent in European unemployment.
In the absence of growth and radical economic reform, what will create jobs? My guess is social unrest or fear of it. Youth unemployment rates that range from 20 per cent to 60 per cent in many European countries is unsustainable. At some point, perhaps soon, mass strikes and demonstrations might go from possible to likely. Some economists think widespread unrest is inevitable.
“I expected much more social unrest, given how terrible the situation is,” Italian economist Luigi Zingales of the University of Chicago Booth School of Business said in an interview. “When 40 per cent of the young people [in Italy] are unemployed, you can’t continue like that for a long time.”