Europe’s Feeble War on Unemployment
Niall Ferguson is Laurence A. Tisch Professor of History at Harvard and is author mosts recently of “The Great Degeneration: How Institutions Decay and Economies Die.” Pierpaolo Barbieri is an Ernest May Fellow at the Harvard Kennedy School. His book, “Hitler’s Shadow Empire: The Nazis and the Spanish Civil War” will be published this fall.
PARIS—European leaders have declared war on youth unemployment. At a meeting we attended in Paris organized by the Berggruen Institute on Governance, President François Hollande of France called on his fellow EU leaders to “act urgently” to address the problem. Germany’s finance minister, Wolfgang Schaüble, warned of an impending “catastrophe” that risks losing “the battle for European unity.” Italy’s labor minister, Enrico Giovannini, added, “We have to rescue an entire generation of young people.” Only a few days ago, his boss, the newish Italian prime minister, Enrico Letta, declared he wanted to make the European summit that begins on June 28 about “the fight” against youth unemployment.
The crisis is real. According to a recent report by the International Labor Organization, the youth unemployment rate in France is now above 23 percent. In Italy it is 34 percent. Conditions in Greece, Portugal and Spain are even worse. Moreover, alarmingly high proportions of unemployed young people have been out of work for more than six months.
True, the official Eurostat figures overstate the problem by excluding students from the work force. Still, even the more realistic figures for “NEETs” (young people not in employment, education or training) are pretty grim. In Italy and Greece, more than a fifth of the working age population are in that category.
In countries like Spain and Ireland, bubbles in construction tempted many young people to drop out of the educational system. Few who did so now stand much chance of getting a job. More generally, high youth unemployment across the periphery reflects the old rule: “last in, first out.”
Yet the plans that were under discussion in Paris strike us as grossly inadequate. Even more worrying, they risk distracting EU leaders from what really needs to be done to revive the European economy.
On the positive side, Germany’s labor minister, Ursula von der Leyen, introduced a promising German-Spanish plan to begin training young workers in languages —in other words, German. This may be a small step, but any increase in labor mobility in the two-speed euro zone is a step in the right direction. An “Erasmus program” for jobs and apprenticeships is another reasonable idea.
Less convincing is the plan to use the European Investment Bank to fight youth unemployment. European governments have recently recapitalized the EIB with an infusion of €10 billion, but obviously not all the new funding will be deployed to fight youth unemployment. Not even close, if we consider the EIB’s development projects around the world and the desire to maintain its AAA credit rating. As with the EU’s so-called structural funds (used for infrastructure and convergence programs in less-developed member states), EIB loans are subject to a variety of tests and funding requirements; it takes time and much effort to deploy the capital. That is why the EIB’s head, Werner Hoyer, warned against arousing “expectations completely over the horizon.”
Total bank lending in Europe is no less than €79 trillion and is structurally far more important to business funding than bank lending in the United States. In both Spain and Italy, total bank lending exceeds €2 trillion each. Even if state-owned development banks like the German government-owned KfW marginally top up the EIB funds, the total increment would amount to a drop in the bucket—we estimate around 0.06 percent of European GDP Yet total credit and domestic bank credit to nonfinancial corporations in the peripheral economies declined by €137 billion between the end of 2010 and the third quarter of 2012, equivalent to 1.1 percent of European Union GDP. According to new data from Confindustria, small and medium-sized enterprises in Italy saw their credit lines cut by more than 27 percent in 2012.
So the various schemes so far unveiled look depressingly like the Hollande “growth agenda” that never really was. They also seem like a great way to avoid talking about the structural reforms that so much of Europe—not least France—really needs. Hollande had no sooner declared war on youth unemployment than he was dismissing European Commission calls for necessary reforms in France. These include lowering employers’ social security contributions, reversing last year’s hike in the minimum wage and reforming the unemployment benefit system “to ensure adequate incentives to work.” Anyone serious about reducing youth unemployment in France would do all three (and whole lot more) tomorrow.
Everyone knows 2013 is a key election year in Germany. A youth unemployment action plan allows Merkel not to appear isolated at the approaching EU summit, which helps deflect recent criticism from her domestic opponents. But what really matters is not a few billion euros worth of job creation schemes. What matters is to accelerate the move to banking union, as the European Central Bank has been urging.
Banking regulation may not be the most voter-friendly topic. Yet the reality is that the best way to create employment in the periphery is by ending the fragmentation of the financial system that continues to plague Europe. As long as Greek, Portuguese, Spanish or Italian entrepreneurs need to pay a premium of between 4 and 6 percent above what their German counterparts pay on bank loans, how can they possibly start new businesses? The European Central Bank’s small and medium business survey last month confirmed that credit conditions continue to “differ significantly across euro area countries.” Monetary transmission mechanisms are still broken.
A faster implementation of a common supervisory framework for European banks under the ECB is indispensable. Even better would be to agree on the other pillars of banking union: an EUtemplate for national legislation on banking resolution with federalized banking recapitalization plans and a path to common EU deposit insurance.
A year ago, a marathon EU summit led to an initial agreement on federalized bank recapitalizations and banking union. The former has since been redefined and the latter has yet to be implemented. The latest Franco-German agreement on Friday only agreed to further postpone the necessary decisions.
Unfortunately, the recent easing of financial conditions in the sovereign bond markets has taken the pressure off Europe’s politicians; even the usually cautious German finance minister has ventured to suggest that the worst is over.
Yet the most recent IMF Global Financial Stability Report points to a future widening of spreads, even in the absence of negative political news. If that happens, Europe’s leaders will rue having squandered the tranquil interlude of early 2013. The real war they should be waging is for a functioning credit system. If they don’t hurry up, young Europeans may be the ones to declare war—on their dithering leaders.