Europe’s Alarming Jobless Problem

Recent numbers from Eurostat reveal that youth unemployment in Europe is still on the rise. This is bad news in itself, but with social unrest simmering across the continent this is slowly turning into political dynamite. The worst part is that Europe’s political and economic leaders are entirely clueless as to what to do about the problem. They call on the European Central Bank to cut its interest rate, somehow believing that it is the sword that will cut the Gordian knot.

It is not, of course. Europe’s problems are much too big to be solved by a simple interest rate cut.

Let’s start with a report from EU Business:

Eurozone unemployment hit a fresh high in April for the 24th month, deepening the plight of the jobless young and raising analyst calls for a cut in interest rates.

A rate cut by the ECB is the same thing as an expansion of the supply of money, or liquidity as it is known in an advanced monetary economy. The problem for the ECB is that it has already expanded money supply handsomely over the past year in an effort to save credit-defaulting welfare states like Greece, Spain, Italy and Portugal.

There are other, real-sector related reasons why the European economy is not moving forward. We will get to those in a minute. First, back to EU Business, which paints a grim picture of a continent in permanent decline:

The latest picture from the Eurostat data agency offered little hope of a quick exit from recession for Europe’s “lost generation” of under-25s. As the economy struggled and 95,000 more people joined dole queues between March and April across the 17-nation eurozone, the unemployment rate edged up to a record 12.2 percent, or 19.3 million people, the Eurostat data agency said. The data brought more bad news for young people who overall are especially hard-hit by the sluggish economy, nearly three times more likely than older people to be unemployed.

Imagine the devastation that this is doing to an entire generation. Unemployment is slowly growing, not shrinking. In more and more European countries, it is more common for a young person to be unemployed than to have a full-time, steady job. In yet another group of countries it is more common for young people to be unemployed than to have any job at all. Here are Eurostat’s youth unemployment numbers from 2012, and these are only the EU member states that have a higher-than-20 percent rate of unemployment among working-age citizens 25 or younger:

2012
Greece 55.3
Spain 53.2
Croatia 43.0
Portugal 37.7
Italy 35.3
Slovakia 34.0
Ireland 30.4
Latvia 28.4
Bulgaria 28.1
Hungary 28.1
Cyprus 27.8
Poland 26.5
Lithuania 26.4
France 24.3
Sweden 23.7
Romania 22.7
United Kingdom 21.0
Estonia 20.9
Slovenia 20.6

In order to keep their welfare states afloat these countries typically need a workforce participation rate way above 70 percent. In fact, over time they need that rate to increase to compensate for expanding demand for welfare-state entitlements and services. (One aspect of this is that high immigration, putting more demand on the output side of the welfare state, only accelerates the need for workforce participation.) How are these countries going to maintain a workforce participation rate high enough to keep their welfare states afloat if as many as one quarter to one half of their young generation cannot even find a job – never mind a job that will pay well and put them on a successful career track?

The EU Business article concurs:

The eurozone is in its longest recession ever and concern is mounting over the growing numbers of jobless youth amid fears they will never get on the careers ladder. In the 12 months to April, almost 200,000 young people joined dole queues in the eurozone and 100,000 in the full 27-nation European Union. Total youth unemployment was at 5.6 million (23.5 percent) in the full EU and 3.6 million (24.4 percent) in the eurozone. But in Greece in April two out of three youngsters were without jobs, one out of two in Spain and two out of five in Italy and Portugal.

This is bad. Very bad. The European economy has entered a new phase, one of permanently lower standard of living, because the cost of the welfare state over the past two decades has weighed down so heavily on the private sector that it has stopped evolving. Taxes and labor market regulations – the former feeding the welfare state and the latter designed to protect it from even higher unemployment costs – have caused the private sector to stop evolving, stop rejuvenating, innovating and keeping up with global competition.

With a stagnant private sector came a stagnant economy. With a stagnant economy came a stagnant tax base and stagnant tax revenues to feed the welfare state. But demand for the services and the entitlements of the welfare state has been rising steadily, especially (but not exclusively) at the lower end where more and more people need unemployment benefits and poverty relief. This forces the legislators of these countries to cut benefits down to a bare-bones level, something they will do very reluctantly. But after having maxed out taxes (partly during the austerity phase they are now in) they will have no other choice.

The unemployed generation will inherit the ruins of the welfare state, the crumbs from the last supper that the generation of their parents enjoyed before voting to turn Europe into an economic wasteland. Rather than structurally and predictably phasing out the welfare state, they chose to stay the course all the way to the edge of the cliff.

The European economy is in such bad shape that it can’t be saved with an interest rate cut. Anyone willing to borrow money at low interest rates will not invest it in starting or expanding businesses. He will instead buy Spanish treasury bonds which still pay almost seven percent interest rate per year. That rate, and the very investment in the bond, is guaranteed by the European Central Bank, the same institution that is pushing lending rates through the floor. By guaranteeing all money back on Spanish bonds the ECB has eliminated the market-based risk assessment of treasury bonds, and therefore artificially inflated the return on that investment.

As a result, anyone with two cents worth of credit will go to a bank in Europe, borrow one million euros at two percent and buy Spanish treasury bonds at seven percent. With an ECB-guaranteed investment, he is cashing 50,000 euros per year without doing anything more than eat, breathe, sleep and walk his dog.

What reason does he have to risk it all by investing in productive activity for an economy that is stagnant or shrinking?

If the ECB let go of the Spanish, Greek, Portuguese, Italian and French welfare states, they could return to reasonable monetary policies. The problem is that you cannot just shut down a welfare state – the hundreds of millions of Europeans who depend on it for their daily lives would suffer undeservedly, and for a long time. The only way to get rid of the welfare state is through structural reforms that gradually transfer the responsibility for operating and funding entitlements to the private sector.

Such reforms will take quite a bit of hard work on behalf of Europe’s elected officials, work that I seriously doubt they would ever want to put in. They seem to be chronically unable to think with the long-term perspective in mind. But if they don’t do anything to save Europe from its transformation into an economic wasteland, they will find themselves faced with much uglier problems than a stagnant economy. Der Spiegel gives us a hint:

Thousands of “Blockupy” protesters gathered in Frankfurt on Friday, surrounding the European Central Bank to air their concerns about euro-crisis policies. Both the banks and police were reportedly well-prepared for the anti-capitalist demonstration. An estimated 2,500 supporters of the anti-capitalist group “Blockupy” demonstrated in the German financial capital of Frankfurt on Friday, blocking access to the European Central Bank (ECB) in protest of euro-crisis austerity policies. Banging on drums and carrying signs that read slogans such as “Block the ECB — Fight Capitalism and Austerity” and “Humanity before Profit,” the demonstrators cut off roads leading into the downtown financial district.

Those of us who saw the “Occupy” movement up close were amused at its transient nature and its disdain for hard work. They were too lazy to even put together a concerted message on what they were for – or against, for that matter. The demise of the “Occupy” movement was inevitable, in good part because this is still America. You can voice your disdain for hard work and self determination all you want, but those values still build the backbone of this country (Obama’s effort to the contrary notwithstanding).

Similar movements in Europe have much stronger political potential. The Europe that emerged from the ruins of World War II put more and more of its economic resources into building a welfare state. Gradually, whatever sentiments of pride in self determination that Europeans had honored, dissipated and were replaced with equally strong sentiments of entitlement and complacency.

The political equivalent of that combination is called “social democracy” or “democratic socialism”. This also became a defining political movement across Europe with dozens of parties with thousands of elected legislators all across the continent. It has now fostered two generations into believing that it is a law of nature that man shall be dependent on government.

When a radicalized youth movement protests “Capitalism” and “banks”, it resonates with millions of young, unemployed and very frustrated Europeans. There is a great deal of potential for radical movements to capitalize on the disenfranchisement that comes with mass youth unemployment, stagnant economies and an overall depressing outlook on the future.

The rhetoric of the German protesters may sound awkward to an American, but they strike a dangerous tone with Europeans:

“The business operations of the ECB have been successfully hindered,” a spokeswoman said, according to the German news agency DPA. “We are making Europe-wide resistance to devastating policies of poverty visible.” The European Blockupy movement … is critical of euro-zone leaders’ approach to the debt crisis. Forcing struggling countries to raise taxes and implement tough austerity measures has only served to deepen the Continent-wide recession, they allege.

This is a correct analysis – nothing to be afraid of in other words. What should have everyone worried is the underlying antipathy for the forces of the free market, Capitalism and economic freedom. To get a glimpse of what these people are aiming for, consider this paragraph from one of the blog articles at Blockupy Frankfurt:

While the German state and media like to portray Germany as a strong economic example, as a “profiter of crisis”, and indeed a broad section of German society identifies with this talk, a closer look reveals other realities. The labor market reform pushed through in Germany in 2004 – slashing long fought-for workers’ rights and securities and resulting in a massive precarization of the workforce – serves as the model for the neoliberal reforms that the German government and European financial elites try to push in all of Europe. Real wages have declined in Germany for the past ten years, while the financialization of ever more spheres of life and the privatization of ever more common goods and spaces lead to a drastic increase in the cost of living. We are struggling against increasing precarity and its constant stress and social destruction.

It is easy for the “right” kind of political movement to turn this frustration into political energy. Let us hope that does not happen. Europe does not exactly have a stellar track record in respecting democracy and economic and individual freedom.

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