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23 December 2010updated 27 Sep 2015 2:02am

The false logic of the deficit zealots

Right-wing leaders in Europe risk leaving a generation on the scrapheap.

By Benjamin Fox

Last week’s EU summit may have brought agreement on a permanent EU bailout system that should help calm financial markets, but it was a huge missed opportunity to introduce measures to reinvigorate EU economies. Leaders came away from the summit saying that they were looking at ways to narrow the gaps in economic performance that have created such a disparity between lives in the rich north and those in the poor south of Europe. But while more economic convergence between eurozone countries is certainly needed it is not the only solution.

The consensus of the right-wing leaders who dominated last week’s summit was still that tackling deficits is the only priority and that countries which, like Ireland, and potentially Spain and Portugal, fall into difficulties must face strict sanctions and fines if they have rising deficits. The treaty change to establish the permanent EU fund states that it can only be used under “strict conditionality”, meaning that any eurozone country needing emergency funding must immediately take austerity steps to reduce its debt or deficit.

For example, it has been proposed that a country in breach of the EU’s Stability and Growth Pact on debts and deficits must pay a fine of 0.2 per cent of its national GDP, with a further fine if it does not comply with the sanctions imposed on it. In other words, you’re in debt so we’ll pile on a bit more. This false logic will simply mean that indebted countries get deeper into debt.

Rather than impose pro-cyclical sanctions and fines that could deepen the problems of a country in crisis, Britain and the rest of Europe would have been wiser to have listened to the advice of the OECD and to look at ways to create growth – the best and fastest way to engender a long-lasting economic recovery. Yet, while politicians and the media were busy focusing on the summit, the publication of the OECD’s Off to a Good Start? Jobs for Youth report went virtually unnoticed, despite its unflinching and timely analysis of how the financial crisis has hit the young generations harder than any other demographic group.

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Indeed, it is no exaggeration to say that youth unemployment in Europe is so high that we risk losing an entire generation at the time we can least afford it. The number of people aged over 45 and edging towards retirement is now higher than the proportion of people who are younger, a demographic shift that is unlikely to change in any way as our population and workforce gets older.

Youth unemployment for 16-to-24-year-olds has soared since the crisis. For example, Spain, Ireland and Greece have all suffered dramatic increases in youth unemployment – particularly Spain and Ireland, where the rates have gone from just under 20 per cent to 40 per cent for Spain and from under 10 per cent to 30 per cent from Ireland. The youth unemployment rate in the UK increased by 4.8 per cent – less than the average, but it still leaves the UK with a youth unemployment rate of 18.9 per cent; that is, more than double the 7.9 per cent national figure.

Of the OECD countries, Britain is in the upper mid-table, showing that the stimulus measures taken by Gordon Brown and Alistair Darling in 2009 and the first half of 2010 kept significant control over unemployment. Germany and Austria are the only countries where youth unemployment has fallen since 2007, but that can be explained by the stronger-than-average growth in those countries this year and also by their well-established apprenticeship and vocational training programmes.

Despite this, the political right at home and in continental Europe, who dominate most European governments, are fixated on deficit reduction and austerity, ignoring that we have an ageing population whose pensions and health care will have to be paid for by today’s youth. It is utterly bone-headed not to try to emulate the success of the likes of Germany and Austria by providing more investment for apprenticeships and vocational training, which doesn’t require significant investment but creates a more skilled and diverse and employable workforce. Similarly, governments should provide economic incentives to companies to hire young people, particularly those who have completed or are completing apprenticeship schemes.

The IMF, OECD, economic thin tanks and economists are all predicting sluggish growth and rising unemployment in Europe in 2011 and 2012. If action is not taken now, the biggest losers will be people in their late teens and early twenties desperately trying to find work. With the children of the 1950s and 1960s getting closer to retirement age, we simply can’t afford to allow today’s youth to be consigned to the scrapheap.

Benjamin Fox is political adviser to the Socialist and Democrat group in the European Parliament.