Can Europe no Longer Afford “La Dolce Vita?”

The European Union gave three of its financial miscreants (Belgium, France, and Italy) Christmas presents early—three extra months to bring their budgets in line with legal requirements. All three governments will exceed the EU’s requirement for budget deficits to not exceed three percent of GDP. The problem, however, is far more serious than a three months grace period can correct. In France’s case, the government has admitted that the three percent target will not be reached until 2017, at the earliest.

But Europe’s real problem is not budget deficits or arbitrary financial requirements. The core problem is the absence of dynamism and economic growth. In the twenty-first century, the GDP growth of the EU has been atrocious. Since 2002, the 28 EU nations have grown on average 1.11% per year; the 18 members of the euro, an even more anemic 0.84%. Why? Three reasons stand at the forefront. Europe isn’t young enough. Europe doesn’t work enough. Europe isn’t friendly enough to business and innovation.

No less a figure than Pope Francis recently criticized Europe at a speech in front of the EU Parliament in Strasbourg as “elderly and haggard.” The sad reality is that this is more matter of fact than manner of speech. According to the European Commission’s official eurostat service, Europe has median population age of 42 years, increasing at a rate of 0.3 years per year over the past dozen years. With Europe’s population growing even more slowly than its economy (an estimated 0.22% in 2014), the likelihood of this precarious pyramid changing is small. The birth rate among European nations is estimated to be approximately 1.6 children per woman—significantly below the 2.2 children per woman replacement threshold. At present, there are approximately four workers for every person over the age of 65, making it more and more difficult for Europeans to work to support their aging populations.

And Europeans, it seems, are simply not working enough. OECD data shows that annual hours worked in Spain has declined from a modest 1,731 in 2000 to 1,665 in 2013. The French ground out 1,535 hours per year on average in 2000, but could only manage 1,489 in 2013. Germany, Europe’s biggest economy is also its biggest offender with German workers clocking a modest 1,471 hours per year in 2000 and a startling 1,388 hours in 2013. Americans by contrast averaged 1,788 hours per year in 2013, respectable, but positively lazy compared with South Korea’s 2,100 odd hours per year.

Finding work to support an aging population is a problem in itself. Eurostat reports, the unemployment rate for the European Union is a robust 10% and has been stubbornly in that neighborhood since the 2008 recession. Spain and Greece have been particularly hard hit, with unemployment over 20% during the past three austerity-laden years. The number of youth unemployed is even more depressing: France 23.7%, Portugal 34.8%, Italy 41.8%, Spain 54.9%, and Greece a crippling 57.3%.

The challenge for young people to find work is aggravated by rigid labor laws and an entrenched older generation. Many young Europeans are seeing the early stages of their careers slip away into a miasma of unemployment and partial employment with little direction or professional coherence. Part of the explanation stems from complex and rigid labor laws. Entrepreneurship and ambition are squelched along with labor markets and demographics. The European Union’s technocratic behemoth has standardized, bureaucratized, taxed, and regulated to such a degree that Europe struggles for competitiveness. In many European countries, firing full-time workers is difficult and costly. Many firms choose instead to avoid hiring full employees, hiring workers on shorter contracts with fewer hours or avoid hiring altogether.

European leaders find it near impossible to change the status quo. Nicholas Sarkozy faced continual strikes as he attempted to liberalize France’s labor market. In Greece, a strike on November 27 effectively shut down the country for 24 hours. Such actions diminish European economic competitiveness and undermine growth. On December 12, Matteo Renzi faced national strikes in response to similar reform attempts in Italy. On 15 December, Belgium was paralyzed by a general strike. Many such actions are taken in protest against austerity and economic hardships, but they contribute to the problem rather than to the solution.

In response to this gloomy picture, the European Commission has, at last, proposed substantive action which might address some, if not all, of the challenges outlined above. On November 26, the Commission, headed by the former prime minister of Luxembourg, Jean-Claude Juncker, proposed a €315 billion investment plan to spur job creation and economic growth. The ambitious plan hopes to attract private investment and direct it towards strategic investments over the next three years. To accomplish this, there are also plans to make Europe more attractive to investment and entrepreneurship by removing regulatory bottlenecks. The goal is to add nearly half a trillion euros to the GDP of the EU in the next three to four years and as many as 1.3 million new jobs.

For all its troubles Europe still has the awareness to recognize the nature of the changes which need to be made. What remains to be seen is whether awareness can be translated into action and ambition can be transformed into concrete investment from private sources. Separately, European countries have pledged reform before without delivering on their promises. Bond-buying programs and accommodative policies from the European Central Bank have been used a substitute for genuine economic reforms.

Europe’s stagnation may not be irreversible, but its recovery is not inevitable. The scale of the problem will require a comprehensive approach which puts more Europeans back to work, working smarter, harder, and in an economic system which is easier to navigate both for their people and for investors from all over the world. Making this happen requires a willingness to challenge many of Europe’s most cherished certainties about employment, benefits, and comfort. It is a necessary battle, however, because the evidence suggests that an entire continent cannot live la dolce vita forever.



Andrew Novo, US

About

Dr. Andrew Novo is Assistant Professor of International Relations and Strategic Studies at the National Defense University in Washington, DC. He holds a D.Phil in Modern History and an M.Phil in International Relations from St. Antony’s College, the University of Oxford. An expert in the history and politics of the Mediterranean world, he is the author of two books including Queen of Cities, a novel about the fall of Constantinople, which has been translated into Greek and Turkish. Andrew has previously worked as a Research Associate at Harvard Business School and as a Sovereign Analyst for a Connecticut-based hedge fund. He has been published in the Cyprus Mail and the Asia Times and has lectured at the National Arts Club, Georgetown University, and the United States Military Academy at West Point.


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