BRUSSELS – As Europe hangs on every public statement about the possibility of more bailouts from the European Central Bank or German Chancellor Angela Merkel, some investors don’t see the wood for the trees.
The focus on short-term stability ignores southern Europe’s powder keg of jobless youth which is set to undermine workforce productivity and pension affordability over the next decade.
Spain, Greece, Portugal and Italy top the list in eurozone youth unemployment.
According to Eurostat data, young Spaniards have it the worst – 46.4 percent of them are out of work. Italian youth, the relatively fortunate ones among their southern European neighbors, still face a dismal 29.1 percent unemployment rate – well above the 20.8 percent euro-area average.
At the same time, the share of total employment for all five-year age groups between ages 15 and 29 plummeted by over 40 percent in each southern country during 2000-2012.
Spain experienced the largest drop in this age range, at 50 percent. The overall aging trend is most notable in Italy, which saw a drop in the employment share of all age groupings from 15 all the way to 39.
In contrast, Germany experienced a mild 6.9 percent decrease in the employment share of people aged 15 to 29, while employment in the 20 to 24 age bracket actually increased by 7 percent.
Southerners also have some of the lowest birth rates in the eurozone.
Between 1990 and 2010, Spain averaged 1.29 children per woman, according to Eurostat. That’s rock bottom. Portugal averaged the highest rate, at 1.44, which is still below the eurozone average of 1.58.
Not only can young people not find jobs, but there are fewer and fewer of them each year.
With every passing month that young people remain unemployed, they lose valuable opportunities to enhance their skills. Many are forced to work on temporary contracts, which give employers more scope to fire people, to give smaller perks and to pay lower wages.
According to the European Commission, the proportion of workers under 25 on temporary contracts in Spain, Portugal and Italy are all above the EU average. Spain and Portugal exceed the average by more than 20 percent. Greece is the only southern country with a lower-than-average incidence of temporary contract labor.
Employers have little incentive to invest in the education and training of employees who won’t stick around for very long.
As a result, Spain, Portugal and Italy have the lowest levels of “human capital” in Western Europe, according to a 2006 Lisbon Council report (there was not enough data to rank Greece).
Already lacking in skills compared to the rest of Europe, the southern countries will fall even further behind once older workers retire over the next 10 years and the young – having been shut out of regular employment during their youth – become mature workers but with little experience.
The southern countries’ labour forces appear to be doomed to regress in terms of productivity if the trend continues.
Pensions will become less affordable for southern European governments as workforces age.
The low birth rates compound this dilemma, as the worker/retiree ratio gets progressively smaller in the coming years. Raising the pension age can buy time, but it is ultimately no use unless young workers replace retirees both in terms of sheer numbers and in terms of skills.
Southern Europe is not helpless in the face of the problem.
Countries need to liberalise their labour markets to make giving proper, full time jobs for young employees more attractive to employers.
Germany did this between 2003 and 2005 when it deregulated self-employment and project contracts and cut back the unemployment benefit system to incentivise work. German youth unemployment has been falling since 2005.
There is plenty of room for reform.
The International Monetary Fund lowered Greece, Italy, Portugal and Spain’s grades on labour market efficiency in 2010.
Despite some reforms undertaken since then, courts in Italy and Spain still squeeze employers by forcing them to pay up to two years of severance pay if they fire people for “economic” reasons. Italian businesses are still forbidden from sacking people for poor performance of their duties.
The terrible irony is that many young people strongly oppose the reforms that would help them.
Most recently, Portuguese Prime Minister Pedro Passos Coelho scrapped a plan to equalise pension contributions for employees and employers after a huge protest march in Lisbon. The pensions burden currently falls mostly on businesses, discouraging them from hiring more staff.
Meanwhile, southern Europe’s economic time bomb of jobless youth keeps ticking. It’s not too late to defuse it, but there is no time to waste.