The issue of dealing with youth unemployment is gaining momentum in the European Union. Germany and France recently announced plans to fight the problem, which currently affects roughly a quarter of the bloc's active labor force under the age of 24. Policies in discussion include reform guidelines set by Brussels and cheaper credit conditions for small and medium-sized companies in the eurozone's periphery. Enforcement will be a key challenge for the European Union if it implements reform guidelines, and the success of cheaper credit lines will depend on the conditions attached to them. While the European Union will likely commit more resources to fight youth unemployment, these policies will have little impact without structural reforms at the national level.
On May 28, French President Francois Hollande announced a series of policies to fight youth unemployment that will be discussed during the upcoming EU summit June 27-28. According to Hollande, the European Union would commit 6 billion euros (roughly $7.7 billion) between 2014 and 2020 to programs designed to create jobs for young people — a proposal that was first discussed during a February meeting of the European Council.
Hollande also mentioned the Youth Guarantee Recommendation, a series of EU guidelines to ensure that people under the age of 25 receive a job offer, continued education or an apprenticeship within four months of leaving formal education or becoming unemployed. According to the plan (which EU leaders discussed in April), member states will carry most of the financial burden of these reforms, but some funds will be made available through the union's European Social Fund. The French president also announced an expansion of the Erasmus program (through which EU university students can study abroad), including more grants for students, trainees and teachers.
Hollande's speech came a week after German and Spanish officials announced a special plan that would put 5,000 young Spaniards into German apprenticeships and other entry-level jobs each year. In 2012, Madrid and Berlin set up a joint task force that is studying how Spain can develop a vocational training system similar to one in Germany. And in mid-May, German and Portuguese officials discussed Germany's technical assistance in creating a financial institution designed to help economic growth and job creation in Portugal.
On May 25, the German press leaked a plan by Berlin to boost credit for small and medium-sized enterprises in the eurozone's periphery. According to Der Spiegel magazine, the German state development bank would grant loans to equivalent institutions in Spain, Portugal and probably Greece. While the exact amount of the loans was not disclosed, German media believe they will be between 1 billion and 10 billion euros. The money will likely be lent at low interest rates to small and medium-sized enterprises struggling for liquidity in order to mitigate one of the main problems facing such businesses and provide them — the main employers in Europe — with more resources to create jobs.
The plan highlights Berlin's attempts to appear as though it is making greater efforts to aid struggling countries, as well as to improve Germany's image to counter growing opposition to the country's austerity strategy. It is also an indication that Berlin is willing to resort to bilateral agreements with certain countries in the periphery to bypass the cumbersome decision-making process in Brussels. The success of the plan, if it is approved, will be linked to the conditions attached to the loans, since Germany may ask for economic reforms in exchange for cheap credit.
Rising Youth Unemployment
The rise in youth unemployment is one of the most notable consequences of the European economic crisis. In the first quarter of 2013, according to Eurostat, seven EU members (Ireland, Greece, Spain, Cyprus, Portugal, Italy and Slovakia) had youth unemployment rates above 30 percent in the 15-24 age range, with Spain and Portugal seeing rates above 50 percent. Youth unemployment in Croatia, which is set to become the European Union's 28th member in July, is also above 50 percent.
The distribution of joblessness is not equal within countries. In Spain, for example, youth unemployment reached 62.3 percent in the southern region of Andalusia, considerably higher than the 40.6 percent registered in Navarre in the north. In Italy, rates vary from 11.6 percent in the northern province of Bolzano to 53.5 percent in the southern province of Calabria. Such disparities are a reminder that, on top of the divisions between the core and the periphery of the eurozone, member states also have significant internal economic differences.
The causes of youth unemployment in the European Union vary from one country to another, but there are some common elements. Because of the crisis, the labor market has become more competitive. The recession has affected young people more than older workers because the young people have fewer qualifications and less experience, and businesses can more easily fire them, especially when they are working under temporary labor contracts. Between 2008 and 2012, the percentage of young people with temporary employment contracts rose from 40.2 percent to 42.2 percent in the European Union. However, only 11 percent of workers over 25 are under such contracts. At more than 60 percent, Poland and Spain have the highest rates of young workers in temporary contracts.
The problem is compounded by the rigidity of the labor sector in many European countries. Particularly in the eurozone periphery, domestic labor markets are exposed to competition from low-wage emerging economies. In many cases, minimum wages are established by law, thus undermining competitiveness.
In some countries, the education system also plays a significant role. Spain and Portugal have the second and third highest dropout rates (people aged 18 to 24 who have finished no more than a lower secondary education and are not involved in further education) in the European Union. Abandoning school before completing upper secondary education hampers the transition to employment and has a persistently damaging impact on careers. In Spain, the unemployment rate of less-educated young people grew by 30 percentage points between 2007 and 2010 — 15.3 percentage points more than the unemployment rate of those who finished secondary education and 20.7 percentage points more than those who obtained a university degree.
The transition into the labor market for young people is also often complicated because peripheral countries lack well-established vocational training systems. The dual vocational training system (known as apprenticeship in Germany and Austria) involves formal training at school as well as practical work within a company. This facilitates labor mobility and ensures that the skills the young workers learn are adapted to the labor market's needs.
Because of the unemployment crisis, many young people in the European periphery decide to emigrate. Others seek employment in the informal economy, accepting lower wage conditions and giving up the most basic labor protection rights. In both cases, states lose tax revenue.
From the Lisbon Strategy to Europe 2020
The European Union tried to address its low productivity levels and economic stagnation a decade ago with the Lisbon Strategy, a set of EU guidelines that would be applied by member states. Lack of enforcement undermined the program, and it was replaced in 2010 by the Europe 2020 strategy, which aims to boost employment to 75 percent of those in the labor force who are 20 to 64 years of age, reduce dropout rates to less than 10 percent and reduce poverty across the Continent.
Youth unemployment became a key issue at a June 2012 EU summit, during which European leaders approved a compact for growth and jobs under pressure from Hollande. As a part of the agreement, the European Union would invest some 120 billion euros in economic stimulus, including a 60-billion-euro increase in the lending capacity of the European Investment Bank. The European Union then discussed plans it called a Youth Employment Package in December 2012 and a Youth Employment Initiative in February 2013.
Most of these plans face the same constraints. Given member states' current budgetary difficulties and EU pressure to reduce their deficits, finding financing for these programs is often a problem. Similarly complex is the issue of fund allocation. The European Union deals with inefficiencies in allocating funds because bureaucracy (and sometimes corruption) in receiving countries often mitigates the impact of EU funding. Enforcement remains a significant issue, because the European Union lacks real power to punish countries that do not follow the guidelines. Even when the European Union has some enforcement power (such as with debt and deficits), punishments are uncommon. Additionally, some policies often become hot political issues at home, as voters in the EU core generally do not support the use of taxpayer money to fund countries in the periphery.
While the European Union's recent moves suggest there is growing concern in the bloc over youth unemployment, EU programs are not a substitute for structural economic reforms. If applied, these measures could mitigate the bloc's unemployment crisis, but they will not be successful over the long term without substantial reforms in some member states. Germany implemented a series of reforms to its labor sector in the early 2000s, with a program that included tax cuts as well as significant cuts in pension and unemployment benefits. The reforms were unpopular at the time, but over the long term they helped reduce Germany's unemployment.
In June the EU leadership will likely commit more resources to fight youth unemployment, fearing greater political instability and opposition to the European integration process in several countries. But unlike the banking and sovereign debt crises, there are no tools that can be used to mitigate the unemployment problem quickly. Many EU members have structural difficulties in integrating their youth into the labor market, and therefore it will take deep and long-term reforms to improve the productivity of the young labor force.