Europe – Eurozone’s economic woes are well documented. High levels of unemployment, low levels of productivity, inefficient socialist governments and high social security bills are all hallmarks of the region’s failed economic experiment.
The Eurozone was supposed to unite a continent that has been ravaged by wars. The project’s initial designers saw the Eurozone as a long-term unification project designed to bring prosperity to all of the region’s economies. But the continent’s long-term economic problems are highly likely to leave long-term scars. The cost of inaction by European governments to cut bureaucracy, reign in spending and stimulate growth is high, the region’s current policy makers are jeopardising the future of an entire generation.
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HSBC’s European Economics analysts Karen Ward and Fabio Balboni look to the cost of Europe’s inaction in a research document on the continent published this week.
The future of Europe looks grim
The true size of Europe’s inaction is staggering. HSBC’s figures claim that governments in some countries including France, Italy, and Spain will run deficits more than two percentage points higher than they had planned a couple of years ago next year — including lower interest costs.
Europe it seems is just muddling through, backstopped by the European Central Bank’s QE. In some regions the continent is actually going backwards. With the exception of Spain, labour productivity is markedly lower in all the other key European economies compared to the pre-crisis period. Real output per person in Italy is now lower than it was 20 years ago. The level of real investment in machinery and equipment by businesses is still below the level seen pre-crisis in most countries. The growth in the capital stock is well below that seen in the 2000s. And even though public sector deficits are exceptionally high, public investment is still well down on the level seen in the 2000s.
It’s not that Europe hasn’t tried to inject fresh capital into the economy, it has. But it would appear that few government officials have any motivation whatsoever to use the capital to stimulate growth. As HSBC explains:
“The EU attempted to compensate with a flurry of public sector infrastructure activity with The European Fund for Strategic Investment (EFSI), also known as the “Juncker Plan”. This was approved at the end of 2014 and aimed to mobilise at least EUR315bn in investment over three years. At the halfway mark, the fund has managed to unlock only about a third of that (EUR115bn)…Despite the underperformance, the president of the European Commission Jean Claude Juncker recently pledged to double the time horizon of the fund, extending it to EUR630bn by 2022. Given the leverage so far to reach that amount, the EFSI is likely to need an injection of fresh money by the EU budget and EIB of at least EUR100bn, much more than the EU countries have been willing to commit so far.”
Youth unemployment is another huge problem for the Eurozone block. The proportion of young people who are not employed, educational training is down slightly from 2013 but is still very high. There are almost 7 million of these ‘NEETS’ 1.3 million of which are in Italy. Once again, Eurozone policymakers have tried to remedy this but sovereign policymakers don’t appear to be interested. The Eurozone’s broader Youth Employment Initiative has set aside €6 billion to remedy youth unemployment. Most of this funding is expected to come from national budgets but across the EU the proportion of GDP being ploughed into government spending on education has been cut over the past five years.
To add to the Eurozone’s woes, in three of the region’s largest economies, the working population is set to start shrinking fairly significantly in the coming decade, according to UN projections. Within 15 years the German, Italian and Spanish working populations may be shrinking by 1% per annum. To maintain output with the population shrinking at this rate productivity must compensate yet given the recent trend in investment in physical and human capital, it doesn’t look as if productivity increases will come to the rescue.