March 30th, 2013

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Europe currently finds itself in the midst of the worst economic crisis since the Second World War. Since the downturn took hold, the number of unemployed in the EU has grown by more than 10 million and today stands at 26 million – about 10.9 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. And in the past year alone, another 2 million have become unemployed.

The reason for this second dip in unemployment is in large part due to the restrictive fiscal policy the EU relies on in order to reduce public sector deficits. EU austerity measures not only sap Europe’s economies of growth, they also increase unemployment.

Figures from French economic institute OFCE show that Eurozone austerity plans will, taken alone, lead to a 1.4 percentage point GDP decline this year.

The EU underestimated just how big an impact austerity measures would have on the economies of member states. The 2010 recovery still has yet to gain traction. At the same time, Europe’s economy remains relatively closed, which means that countries have to rely on trade with each other. So when countries all start tightening fiscal policy at the same time the impact is profound.

The European Commission and other organisations have since had to downgrade their outlook for the EU economy. In fact, the most recent commission forecast now predicts a recession in the Eurozone in 2013, where it previously expected growth.

The consequences of this misdiagnosis, however, are much more serious than missed growth forecasts. It also has a significant impact on social welfare and can lead to large numbers 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 over 11 million people – or about 45 percent of all unemployed – have now been without a job for more than a year.

The long-term unemployed are less attractive for employers, which only makes it even more difficult for them to find work. One could fear that the long-term unemployed could develop a sense of dejection and consequently wind up only marginally attached to the labour force – if they don’t wind up permanently out of employment and socially marginalised. In fact, OECD data indicates that the number of marginally-attached workers has risen during the downturn, which can be seen as a sign of growing marginalisation.

High levels of long-term unemployment can make it difficult to bring unemployment figures down, and could serve to raise the structural level of unemployment in the EU. This would make it even more difficult to stimulate growth, welfare and healthy public budgets.

High levels of youth unemployment are also a source of concern since long-term unemployment is something that can haunt young people for years. Young Danes who went without jobs for extended periods of time in the 1990s, for example, were even after 15 years less likely to hold stable employment than their contemporaries who managed to find work.

The number of young Europeans without a job is currently 9.2 million – or 18.2 percent of 15-29 year-olds in the labour force. Unemployment rates, however, tell only part of the story.
For a more complete picture, you need to look at the number of young people without jobs and who are not enrolled in any sort of formal education or training. In 2011, this combined figure stood at 15 million – or 16.7 percent of the total EU population of 15-29 year-olds.

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 division and increased tensions among Europeans.

The seriousness of the situation might just be about to sink with the European Commission. It’s president, José Manuel Barroso, recommended recently “a more pragmatic and flexible policy” that allows for more time to implement cuts and stimulate economic growth in the countries “where growth has been lower than expected”.

No matter what, a new approach is required if we are to minimise the downturn’s impact on social welfare.

The author is a senior analyst with the Economic Council of the Labour Movement (AE).