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European Unemployment Shows Big Government Means Poor Jobs

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The unemployment rate in the euro area fell to 7 percent in December and 6.4 percent (pdf) in the European Union, compared with the United States at 3.9 percent. We mustn’t forget that these unemployment rates don’t include furloughed jobs covered by unemployment retention schemes, which account for another 5 million workers waiting to return to normal activity.

After a fiscal stimulus plan of more than 5 percent of GDP in 2020 and another 4 percent in 2021 and the European Central Bank purchasing 100 percent of net issuances from most sovereigns, the recovery shows a concerning weakness. Furlough jobs are rising again, working hours are still below the pre-pandemic level, and real wages are falling as inflation eats into the recovery.

In December 2021, the youth unemployment rate was 14.9 percent in both the EU and the euro area.

These unemployment levels are high, but some member states have even higher jobless ratios. Spain has a 13 percent official unemployment rate with still 220,000 furlough jobs, and the youth unemployment rate stands at 30 percent.

What these figures show is that high government spending and enormous employment retention schemes haven’t helped to get the European economy to recover faster or improve job creation compared to similar economic zones.

The economic recovery has been slow and job creation even slower. Furthermore, a large proportion of the job recovery has been from the public sector. In Spain, for example, there are still 95,000 fewer jobs in the private sector than before the pandemic and 220,000 more in the public sector.

The EU faces unique challenges due to demographics, elevated levels of government spending, and a weak energy position, where businesses and households pay much higher power and natural gas bills than their U.S. counterparts.

In the face of all these challenges, the EU has launched a massive recovery plan (Next Generation EU), which aims to boost growth and competitiveness. The problem is that it’s difficult to see how these enormous spending plans are going to deliver the expected transformation and growth.

The biggest problem that the EU faces is technological. The EU hasn’t even presented itself as a serious contender in the technology race. Less than 4 percent of the Stoxx 600 market cap comes from technology, compared to 25 percent in the S&P 500. It’s difficult to believe the radical change in growth and pace of job creation will come from a large stimulus plan directed by governments and focused on climate change and sustainability from a political and not entrepreneurial perspective.

The EU is betting its entire the future on the loose concept of the “entrepreneurial state” championed by Italian economist Mariana Mazzucato. Governments and socialist parties love this idea that makes them believe that giant tech companies such as Apple or Amazon owe it all to government spending and the public sector. The problem is that such fantasy has been completely debunked by reality—the EU lags in global technology reach. In “The Myth of the Entrepreneurial State,” Deirdre McCloskey and Alberto Mingardi debunk the fairytale that the public sector stands at the forefront of technology innovation and progress.

Unfortunately, the Next Generation EU plan is likely to create such little impact as the Juncker Plan or the Growth and Jobs Plan of 2009. The main problem is that it aims to spend a massive amount of money rapidly in areas that are favored by politicians while the European economy suffers from rising input, energy, and raw materials costs. The European economy is losing competitiveness from rising producer prices and weaker margins, and part of it comes from banning shale gas and imposing an uncompetitive and politically directed energy policy. All those things can change quickly with serious policies aimed at supporting small businesses and families with lower taxes, but the reluctance of policymakers is enormous.

In 2009, some countries decided to use the Growth and Jobs Plan to finance lower taxes and reduce red tape. This time, unfortunately, the Next Generation EU plan is focused on spending under the guidance of a political vision.

It could be an extraordinary opportunity to reduce energy prices and boost small and medium enterprises to become the new technology giants. Unfortunately, there’s a high risk that this new program will become another massive spending spree on Keynesian white elephants with no real economic return. The potential of the EU is enormous, but “dirigisme” is preventing many countries from growing closer to their potential.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Daniel Lacalle

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Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”



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