Euro Crisis: The Real Victims? The Young!

Joblessness in the Euro zone reached the highest level in 15 years in February 2012, with more than 17 million people unemployed, according to Eurostat. That's 10.8 % of the labor force. The Euro crisis that started two years ago has painfully hit the young: they suffer more from unemployment than any other age group - around 45% in Spain, Portugal and Greece, and climbing elsewhere in Europe. The more you go to the south, the worse it gets, but it's pretty bad in Ireland too.  Ireland was supposed to be a showcase for the effectiveness of the brave austerity measures it had taken in response to EU demands and especially from the Germans, yet it is suffering from both unemployment and (once again) emigration of its labor force.

What happened? Why is all that austerity demanded from countries in debt when their primary problem is lack of growth and unemployment? Because - starting in Germany - the whole of Northern Europe wants fiscal discipline. It refuses to pay for the laxity and corruption shown by Southern Europe.

Look at these Germans protesting against the ESM in Berlin, in front of the Bundesbank while a meeting of the Governing Council of the European Central Bank was ongoing inside to discuss measures to counter the growing European debt crisis. That was on 6 October 2011 when the President of the European Central Bank was still Jean-Claude Trichet (today we have the Italian Mario Draghi). 
BERLIN, GERMANY - OCTOBER 06:  Protesters hold... (Image credit: Getty Images via @daylife)

If you read their sign, you realize they understand nothing at all about what is happening, what sort of crisis this is and what needs to be done. Their poster reads: "Family Without Debt! No to the ESM". 

What is the ESM? The European Stability Mechanism, some €500 million intended to be added to the existing ESFS (European Financial Stability Facility), so that together they add up to some €700 million - considered a minimum firewall to defend the Euro.

These are people who equate private debt with public debt, as if it were the same thing and required the same kind of attention. I've blogged before about the difference between private and public debt and won't go into details here, but it is obvious that the time frame is necessarily different as are the concerned target groups. As a family you have to balance your budget every month. As a nation, you can do it over years - even generations - provided you do it responsibly and get back into balance overtime. In short, the management of a nation's debt has only very distant similarities to household debt management.

True, we are facing a humongous problem. What started as speculative attacks against the Greek sovereign debt, morphed into a deadly combination of investors' lack of confidence, a bank credit crunch and austerity measures that have strangled growth, especially in Greece. Consider what happened there: in 2011, Greek GDP shrank by 6.8% even though Greece had received bailout funds equal to 57% of its GDP. Without throwing more statistics at you, believe me,  the situation is just as dire in Portugal, Spain and Ireland and not much better elsewhere in Europe. Including the UK, even though it's outside the Euro zone - but then, it has the bad luck of having a Conservative government that, going against every kind of economic evidence and good common sense, believes blindly in the virtues of austerity.

The European Central Bank's 1 trillion euros ($1.3 trillion) of three-year loans to banks that started in December 2011 has helped relieve the credit crunch. Unfortunately - and now we are three months later and the first data is coming out - it would seem that this has not yet translated into more (or enough) lending to business. Meaning no uptick in employment. Last week, the ESM was finally adopted but the total firepower achieved to defend the Euro did not win unanimous consent.  Not enough according to some who would have preferred a nice round figure like one trillion, too much according to the Germans, about right according to the IMF.

Beyond the abstruse activities of central bankers, Northern Europeans feel strongly that the only medicine is austerity. And it's not just Germany. Finland's Prime Minister Jyrki Katainen recently (24 March) told journalists that "crisis management can't be outsourced to the central bank. Member states have a couple of years to take austerity measures to restore and strengthen credibility for when the operations end." Even the ECB acknowledges it can't do it on its own, that the governments have to start behaving responsibly and adopt the necessary measures.

But what measures, more austerity in the midst of a recession? Even in Germany, the outlook for the manufacturing and construction sectors is bleak. It is astonishing to see how pig-headed European politicians are. The Italians are very lucky to have Mario Monti who wants measures to jump start the economy along with the necessary fiscal discipline (his "cresci Italia" plan to stimulate growth, unveiled in January). Unfortunately he belongs to a minority. When Spain's Prime Minister Mariano Rajoy made it plain he couldn't abide the EU austerity demands and set his own deficit target at 5.8% of GDP  (instead of 4.4% as required), all hell broke loose. Why couldn't he abide the EU?

Because of unemployment, that's why. Unemployment in Spain is the worst in Europe, around 24% and climbing (not to mention once again that among the young, it's one unemployed out of two). Then there's another less obvious reason (and a dangerous one): he has little control over Spanish regional governments that have gotten themselves into deep debt, yet they are responsible for delivering two of the most important government services: health and education. How Spain will sort itself out is anyone's guess.

So more pain is coming. Some people design catastrophe scenarios (see articles below) whereby Spain refuses to play the Euro bailout game and Germany opts out of the Euro rather than facing payments to help Euro partners.

Do I believe that will happen? No, not really. If Germany left the Euro, there would be hell to pay, international commerce would collapse for a start. For an export-dependent country like Germany, such a scenario is simply not credible. I'm convinced our political class will muddle through as usual. Problems will remain, half-solved. The Euro will never replace the dollar but it won't sink out of sight either.

In the end, the usual victims will pay: the young. And to think that even in good times before the 2008 Great Recession, the young had grave difficulties finding jobs: the last time job-hunting was relatively easy when you earned your university degree was back in the 1970s. Since then, it's been nothing but a nightmare.

Imagine now, even in wealthy France, some 120,000 families live in tents, trailers, even cars because they cannot afford renting an apartment. And most of them are young. Yes, the Specter of Poverty is stalking Europe...Good thing that so many tents are modern, state-of-the-arts but still nothing more than canvas...

Svenska: Vildcamping i Varberg  (Photo credit: Wikipedia)

Even in Germany. Yes, that's a little known fact: Germany has done an incredibly good job of hiding its real level of unemployment. It's been touting its export model of development as the nec plus ultra growth strategy, bragging to the rest of Europe how clever it was, pretending that fiscal rectitude was the key.

What key? The facts of the situation are very different: the German export machine (BMW, Mercedez, Siemens and others) sold to China and other big emerging markets that were not hit by the 2008 recession: this had nothing to do with fiscal discipline. German unemployment went down - but it was only the effect of more jobs in the export industries, nothing else.

In reality the young continued - as in the rest of Europe - to face grave difficulties in finding jobs in line with the university degrees they'd earned. Small wonder that Germany's internal consumption continues at a low level. France has many times chided Germany for not boosting its internal consumption (among them Christine Lagarde when she was France's Finance Minister). But there's nothing Germany can do about that: people are afraid to spend their savings. They don't know how long they'll keep their job and they have to maintain other family members who either don't work or work at a minimum wage - yes, you've guessed it, the young of course.

So how did the German government manage to pull a veil over its real unemployment situation?  First, there's a policy that goes by the delicate term of "Kurzarbeit" (short work) and is meant to be temporary. It serves as an alternative to layoffs in times of economic slowdown.  The German government compensates up to 67% of the foregone net wages of an employee if the employer needs to cut wage costs and working time because of the slowdown, while pension and health care costs are fully met by the Federal Employment Agency. About 1.5 million jobs are covered by the scheme. Some 400,000 jobs are said to have been saved, about the equivalent of 1% unemployment. Not everyone likes the system: it is likely that it maintains some dead-weight jobs alive and slows down job reallocation.

But there's another policy less well known that ensures that the young stay locked in temporary jobs: it provides for internships and apprenticeships that sound quite attractive. They are temporary contracts (usually two years) that are practically cost-free for business while paying the employed young a minimum wage. Unfortunately there's a catch: when the contract is up, while the hope is that firms would take on the young employees permanently on their payroll, that usually doesn't happen. Simply because it makes good business sense for the employer to seek a similar cost-free contract with yet another young candidate. And if you think this game only concerns a few people, you'd be wrong: according to a program I saw on ARTE TV, it may concern up to 5 million people! In short, a whole generation is deprived of any hope for a future career. But the employment statistics look good!

Germany has been able to play this game as long as it has sold abroad and government coffers are full but now, many of its markets abroad are slowing down.  Maybe the Middle East will pick up thanks to oil, but if the recession really spreads, oil prices will also go down. 

So rather than worry about fiscal discipline and austerity measure, thought should be given to structural reforms to liberalize the labor market (but these are long-term) and measures to jump  start the economy in the short term. Among them: fiscal incentives to small and medium-size enterprises to help them get started or continue growing; education, training and refresher courses; simplification of the bureaucracy to obtain commercial licenses; liberalization of working hours etc

Many such measures require funding from the government and when they do, every effort should be made to respect the rules of fiscal discipline - but surely some rules could be suspended for a time until the economy has started growing again. And at that point, once the "good times" are back, you apply with force every fiscal rule in the book and seek to balance the budget, but not before...And by the way, once the economy has started growing again, more tax revenues flow into government coffers: that's when it becomes a lot easier to balance the budget...
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