The informal meeting of the European Council on 30 January was yet again an attempt to corner the Euro crisis that is paralyzing EU economies. Although the main focus should have been unemployment and economic growth, most attention was given to the new treaty regarding budgetary and fiscal policy. 25 out of 27 EU countries, (the UK and the Czech Republic refused to sign up), reached an agreement to comply with the rules for budget and debt control. This treaty is a first step towards a common fiscal and monetary policy and will oblige member states to limit their budget deficits to 0, 5% of GDP and their debt to GDP limit to 60%. Member states that infringe these measures can be brought before the European Court of Justice by another member state.
With the EU unemployment rate reaching an all-time high, it was not a moment too soon to address the problems of employment and growth. The European Council has adopted a statement in which it recognizes the problem while publishing a list of measures with the focus on reducing youth unemployment, enhancing the single market and financing small enterprises. Notwithstanding the good intentions of these measures, the chances are great that it is just too little too late with concrete actions delayed to the next summit in March. It is alarming to observe how little attention the EU leaders have spent until now on the subject of unemployment and growth considering that the principal driver of reducing debt is sustainable growth. Although reform of entitlement structures, pensions and government is a necessity across the EU, the extreme focus on austerity and budgetary control is impeding member states in making the crucial investments needed to foster economic growth and diminish unemployment.
A grim economic outlook…
All the economic indicators disclosed at this moment demonstrate that recession is looming around the corner and we’re in for a long period of low economic growth. The austerity plans and the lack of certainty caused by the never ending euro crisis clearly affect consumer confidence. These doubts are also shared by the relevant industries, resulting in a drop in investment. Growth perspectives for the whole European economy were reduced to 0.5% with only few countries able to maintain positive growth. Especially the countries in the heart of the euro crisis - Spain, Greece, Ireland, Portugal and Italy - are all suffering from a reduction in growth due to the cut in spending, lack of credit and the high borrowing costs.
The most worrying parameter however is not the lack of growth but the continuing rise in unemployment. Far too little time was spent addressing this issue by the European leaders, but with a record unemployment rate of 10, 4 % swift actions has to be taken. There is a lot of divergence in the countries rates, stemming from 4% in Austria to 22% in Spain. All the countries in the southern periphery and especially the GIPSI countries are however faced with double digit numbers. The generations most affected by unemployment are 15-24 year olds since it is much easier to lay them off during a downturn in comparison with their older colleagues.
In 2012 it is expected that Spain and Greece will reach a youth unemployment rate of more than 50%! This situation is unsustainable and has been neglected for too long. Younger people are more likely to be trapped in a vicious circle of unemployment which leads to poverty, social exclusion and emigration. Already thousands of young but educated Greeks, Spaniards and Portuguese are leaving Europe because of their limited chances on their own labor market. The prospect of a lost generation is not far away any more.
…that won’t be turned around by austerity alone…
To regain the markets’ confidence and restore growth, a vision on public finances was formed with a sole focus on austerity and budget control. This was crystallized in the pending treaty where all countries are obliged to limit the structural deficit to 0, 5%. Although the legislation has yet to be adopted by the member states as well as the calculation method, it implies that a real countercyclical policy from now on is forbidden. Many economists and institutions have raised questions concerning this notion because greater government spending can mitigate the effects of a recession. Although fiscal consolidation is necessary to ensure sustainable growth and debt must not be used to pay for social benefits, it is likely that the EU is pushing far too hard on the brakes which are harming most the economies of the already depressed countries. Governments of the GIPSI countries are trying to lower their debt by cutting wages, pensions and employment. As a result the economy is shrinking and government debt doesn’t decline much because of a decline in income tax and a rise in unemployment benefit. This is a vicious circle where debt is not reduced; interest rates remain high and more importantly, unemployment is skyrocketing. By focusing solely on debt reduction, Europe is running the risk of throwing out good features of our development model along with the weak ones.
…but by focusing on the single market, the green economy and curbing youth unemployment.
As the top priority the EU should ensure that policy measures are taken to encourage labor mobility. In a single currency market, imbalances can only be surpassed by enough flexibility of the workforce. The current situation – 22% unemployment in Spain, 4% in Austria - is a clear example where lack of labor mobility gives rise to excessive unemployment in the south due to a recession and record low employment rates in the north due to economic growth. Amid the proposed measures of the European Council the enhancement of the single market is the most important one. It has propelled the European Union in prosperity in the past and has the ability to do that again. Much will be gained from opening the digital market and strengthening the services market.
Furthermore, the low-carbon economy which Europe is trying to achieve by 2050 needs an enormous amount of public investment in every country to reinforce the transmission network and to establish a renewable energy park. These investments are better exempted from the budget treaty since these are prerequisites for renewed growth and an energy efficient Europe. Whilst focusing on fiscal austerity, debt and interest rates Europe tends to neglect the 26 million young Europeans that are unemployed and the numbers are rising. If the EU does not shift its focus rapidly from an austerity-only approach to a fundamental reform of the government and labor market, enhancing the single market, pooling some of the debt into common Eurobonds and investment in a carbon free economy, the chances are great that the EU will lose an entire generation to long-term unemployment.