Europe is in the midst of the worst economic crisis since the Second World War, leaving a generation of youngsters unemployed. A new approach is required if we are to avoid a devastating impact on social welfare, writes Erik Bjørsted.
Erik Bjørsted is chief economist at the Economic Council of the Labour Movement, in Denmark.
Europe currently finds itself in the midst of the worst economic crisis since the Second World War. Since the downturn, the number of unemployed in the EU has increased by more than 10 million, and today stands at more than 26 million – about 10.7 percent of the European workforce.
During the first phase of the downturn, European countries passed stimulus plans to stem the loss of jobs. Even though these plans were not co-ordinated, and even though the plans perhaps were too small, unemployment had, in fact, begun to stabilise by the summer of 2010. But, starting in the spring of 2011, unemployment, particularly in the Eurozone, began to rise rapidly again.
The reason for this new increase in unemployment was largely due to the restrictive fiscal policy the EU chose to rely on in order to reduce public sector deficits. EU austerity measures not only sapped Europe’s economies of growth, they also increased unemployment.
The EU underestimated just how big an impact the austerity measures would have on the economies of the member states. Europe’s economy remains relatively closed, which means that countries rely on trade with each other, so when countries all start to tighten fiscal policies at the same time, the impact is multiplied.
Not surprisingly the European Commission and other organisations since had to lower their forecasts for the EU economy.
The consequences of this misdiagnosis, however, are much more serious than poor and misguiding growth forecasts by the Commission. It also has a significant impact on social welfare, which can lead to large number of people being forced to the margins of society and into poverty.
As an example, we see that the number of long-term unemployed is rising sharply again, and today 12½ million people – just below half of all the unemployed in the EU – have now been without a job for more than a year. Even now where the overall unemployment rate seems to have stabilized, long-term unemployment is still rising.
The longer one is unemployed, the more difficult it is to get a job. Firms do not find long-term unemployed workers as attractive as workers who have avoided unemployment or at least long-term unemployment.
The increase in long-term unemployment may install severe problems for Europe in the future. Longterm unemployment can make it more difficult to reduce unemployment again, and as a consequence, the underlying structural unemployment level may increase.
If indeed the increase in long-term unemployment will turn into a higher structural level in unemployment, growth potential in the future will become smaller, and it will also be more difficult to make public budgets balance since costs for unemployment benefits will go up, and tax revenue will go down.
Also, sooner or later, the large group of long-term unemployed will run out of unemployment benefits, increasing the risk of poverty if they do not get a job.
OECD data also indicate that the number of marginally attached workers has risen during the downturn, which can be seen as a sign of growing marginalisation.
Rising levels of long-term unemployment, youth unemployment, the risk of increased marginalisation, and with it higher rates of poverty, all carry with them the potential for greater social divisions and increased tensions across Europe.
Therefore a new approach is required if we are to minimise the downturn’s impact on social welfare.
Continued austerity makes the problem the worse. Part of the solution is therefore to allow for more fiscal expansion in countries that do have the fiscal maneuver room. Also, resources from the EIB, and unused funds from the structural funds, could be used for private investments in the EU.
However, it is also necessary to make labor markets more flexible to reduce the risk of long term unemployment. Countries with more flexible labor markets thus tend to have lower long-term unemployment rates. This approach should however be accompanied with better unemployment insurance systems.
Finally active labor market policies which aim at increasing both the employability and the educational level of low-skilled workers, are important tools in fighting long-term unemployment.