Europe Unemployment: Big Government, Less Jobs

Authored by Daniel Lacalle,

The unemployment rate in the Euro Area fell to 7% in December and 6.4% in the European Union, compared with the United States at 3.9%. We cannot forget that these unemployment rates do not include furloughed jobs covered by unemployment retention schemes, which account for another 5 million workers waiting to return to normal activity.

After a fiscal stimulus plan of more than 5% of GDP in 2020 and another 4% in 2021 and the European Central Bank purchasing 100% of net issuances from most sovereigns, the recovery shows a concerning weakness. Furlough jobs are rising again, working hours are still below the pre-pandemic level and real wages are falling as inflation eats the recovery.

In December 2021, the youth unemployment rate was 14.9% in both the EU and the euro area.

These unemployment levels are high, but some member states have even higher jobless ratios. Spain has a 13% official unemployment rate with still 220 thousand furlough jobs, and the youth unemployment rate stands at 30%.

What these figures show is that high government spending and enormous employment retention schemes have not helped to get the European economy recovering faster or improve job creation compared to similar economic zones.

The economic recovery has been slow and the job creation even slower. Furthermore, a large proportion of the job recovery has been from the public sector. In Spain, for example, there are still 95k less jobs in the private sector than before the pandemic and 220k more in the public sector.

The European Union faces unique challenges due to demographics, elevated levels of government spending and a weak energy position, where businesses and households pay much higher power and natural gas bills than US counterparts.

In the face of all these challenges, the European Union has launched a massive Recovery Plan (Next Generation EU) which aims to boost growth and competitiveness. The problem is that it is difficult to see how these enormous spending plans are going to deliver the expected transformation and growth.

The biggest problem that the European Union faces is technological. The EU has not even presented itself as a serious contender in the technology race. Less than 4% of the Stoxx 600 market cap comes from technology, compared to 25% in the S&P 500. It is difficult to believe the radical change in growth and jobs pace will come from a large stimulus plan directed by governments and focused on climate change and sustainability from a political and not entrepreneurial perspective.

The European Union is putting it entire bet for the future on the loose concept of the “entrepreneurial state” championed by Italian economist Mariana Mazzuccato. Governments and socialist parties love this idea that makes them believe that giant tech companies like Apple or Amazon owe it all to government spending and the public sector. The problem is that such fantasy has been completely debunked by reality -the EU lags in global technology reach-.  In “The Myth of the Entrepreneurial State”, Alberto Mingardi and Deirdre McCloskey debunk the fairy-tale that the public sector stands at the forefront of technology innovation and progress.

Unfortunately, the Next Generation EU plan is likely to create such little impact as the Juncker Plan or the Growth and Jobs Plan of 2009. The main problem is that it aims to spend a massive amount of money rapidly in areas that are favoured by politicians while the European economy suffers from rising input costs, energy, and raw materials. The European economy is losing competitiveness from rising producer prices and weaker margins and part of it comes from banning shale gas and imposing an uncompetitive and politically directed energy policy. All those things can change quickly with serious policies aimed at supporting small businesses and families with lower taxes, but the reluctance of policymakers is enormous.

In 2009, some countries decided to use the Growth and Jobs Plan to finance lower taxes and reducing red tape. This time, unfortunately, the Next Generation EU is focused on spending under the guidance of a political vision.

It could be an extraordinary opportunity to reduce energy prices and boost small and medium enterprises to become the new technology giants. Unfortunately, there are elevated risks that may lead this new program to another massive spending in Keynesian white elephants with no real economic return. The potential of the European Union is enormous, but “dirigisme” is preventing many countries from growing closer to their potential.