Home Economic Trends European Government Expansion Did Not Expand the Job Markets – Daniel Lacalle

European Government Expansion Did Not Expand the Job Markets – Daniel Lacalle

For the past two years, governments in the European Union have engaged in contradictory actions by both suppressing economic growth through lockdowns and other covid-19 restrictions and simultaneously trying to “stimulate” their economies through monetary expansion by the European Central Bank. The results, not surprisingly, have fallen far short of hopes and expectations by central bankers.

The unemployment ratein the euro area fell to 7 percent in December and 6.4 percent in the European Union, compared to the rate of unemployment in the United States of 3.9 percent. However, these unemployment rates do not include furloughed jobs covered by unemployment retention schemes, which account for another five million workers waiting to return to normal activity.

After a fiscal stimulus plan of more than 5 percent of gross domestic product (GDP) in 2020 and another 4 percent in 2021 and the European Central Bank purchasing 100 percent of net issuances from most sovereign debt instruments, the recovery is very weak. Furloughed jobs are rising again, working hours are still below the prepandemic level, and real wages are falling as inflation eats into gains made during 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 furloughed jobs, and the youth unemployment rate in that country is 30 percent.

These figures show conclusively that massive government spending and enormous employment retention schemes have not helped to get the European economy to recover faster or improve job creation compared to economic zones elsewhere.

The economic recovery has been slow and unemployment reduction is 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 began, while public sector employment has grown by 220,000 jobs. Instead of creating a real economic recovery, Spanish policies are making things worse.

The European Union 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 US counterparts. In the face of all these challenges, the European Union has launched a massive recovery plan (Next Generation EU) which supporters claim will boost growth and competitiveness. The problem, however, is that this plan will increase burdens on wealth-creating private enterprise and will deliver the predicted transformation and growth.

The biggest problem that the European Union faces is the lack of a technology sector, as the EU is not a serious contender in the technology race. Less than 4 percent of the Stoxx 600 market cap comes from technology compared to 25 percent of the S&P 500. It is doubtful that a radical change in economic growth and employment will come from a large stimulus plan directed by governments and focused on environmental themes of climate change and sustainability that come from political perspectives, not entrepreneurship.

Instead, the European Union is putting its entire bet for the future on the false concept of the “entrepreneurial state,” which is championed by Italian economist Mariana Mazzuccato. Governments and socialist parties love the idea that giant tech companies like Apple or Amazon owe their success to government spending and public sector employment. This idea is a fantasy that has been debunked by the hard reality that the EU lags in global technological reach. In “The Myth of the Entrepreneurial State,” Alberto Mingardi and Deirdre McCloskey debunk the notion that the public sector stands at the forefront of technological innovation and progress.

Unfortunately, the Next Generation EU plan is likely to repeat the failures of the Juncker Plan and 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 costs, energy, and raw materials. 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, politically directed energy policy. All those things can change quickly with serious policies aimed at supporting small businesses and families with lower taxes, but policymakers are reluctant to take steps that will increase real economic growth.

In 2009, some countries decided to use the Growth and Jobs Plan to finance lower taxes and reduce red tape. Unfortunately, that won’t be possible this time around because the Next Generation EU is focused on spending under the guidance of a political vision.

There is an extraordinary opportunity to reduce energy prices and boost small and medium enterprises so that they will become the new technology giants. Unfortunately, there are elevated risks that may lead this new program to more massive spending on Keynesian white elephant projects with no real economic return. The potential of the European Union is enormous, but “dirigisme” is preventing many countries from growing closer to their potential.