Europe’s Double Jeopardy

With draconian spending cuts and climbing unemployment threatening to push Europe back into recession, the pe­ndulum of reform seems set to swing again — this time away from austerity. The habitual financial scolds at the IMF have backed off their ‘tough love’ approach and are calling for relaxing the austerity drive to stave off recession. Even bond market bosses want governments to ease off the belt-tightening. The easing of credit and job shedding could gen­erate demand and encourage businesses to hire again. They might also improve the export prospects of developing countries. At a macro level, Keynesian pump-priming mi­g­ht help stop the slide back to recession, but it is unlikely to re­ignite Europe’s growth significantly. The growing burden of an ageing population, combined with the lost generation of unemployed youth, has made structural reforms far more difficult to achieve.

As the debt crisis hit Europe, one European country after another was forced to embrace austerity as the path to salvation. Spending was slashed, workers laid off, healthcare and pensions were squeezed and taxes raised. Bailout money flowed to prevent economies from keeling over. At the time, the bitter medicine seemed to work: the eurozone held together and markets stabilised, but widespread misery in some of the countries such as Greece and Spain and soaring unemployment have since made the cost of the rescue clear. Record unemployment (nearly 30 per cent in Greece and Spain) not only threatens to trigger revolt but also poses a threat to the unity of the European Union. Jose Manuel Barroso, the European Commission president, admitted that “with unemployment, uncertainty and growing inequality, a sort of ‘European fatigue’ has set in”. Anger against Germany, which spearheaded the harsh austerity drive, is bubbling in the Mediterranean countries. A leaked French document revealed the depth of anger against Chancellor Angela Merkel despite a public show of Franco-German bonhomie. A recent poll found that 72 per cent people in the top six countries of Europe had no faith in the EU.

Facing growing disenchantment with the EU and a revolt against austerity policy, Germany might be forced to moderate its stance. An easing of fiscal policy and new stimulus to create jobs might reduce the pain, but would only provide a short-term fix. Over the long-term, challenge to the EU comes from the continent’s greying population and the soaring rank of unemployed youth who could be its productive core. Ossified labour laws and an extended retirement age mean that the young fill the ranks of the unemployed. Some 23.7 per cent of the unemployed in Europe are below 25. The rate of youth unemployment hovers around 30 per cent in Italy and 50-60 per cent in Spain and Greece.

About a quarter of the EU population will be elderly (65+) by 2030, compared to about 18 per cent today and yet the very age group that would be the main workforce now find themselves on the margin of society.

More troublesome for the future is that four out of 10 unemployed have been jobless for a year or longer. Long periods out of school or jobs leads to loss of skill, creating a ‘lost generation’ of workers who might be unfit for gainful employment. Already, one-third of Europe’s working age population has no, or low, formal qualifications. And according to an EU estimate, 11 per cent of new jobs likely to be created in the next decade would require highly skilled workers — very much the force that could have come from the ranks of the youth now condemned to long-term unemployment.

It is not that euro bureaucrats were unmindful of the dangers. Official reports have warned of long-range unemployment and the urgent need to meet both skills shortage and skills gaps. The detailed recommendations to remedy the situation seem to have gone the way of many other reports — gathering dust as unemployment rises to new heights.