DFUL, appalling, horrible – that is the only way the latest unemployment figures for the Eurozone, now at a record 12.1 per cent, can be described. There are 19.2m jobseekers in the currency area, the population of a medium sized country. As ever, the young, who are outsiders with limited experience or professional networks, are being hit disproportionately.
Tragically but unsurprisingly, Greece’s 16 to 25 year olds are the worst affected, with a grotesque 59.1 per cent out of work, followed by 55.9 in Spain and 38.4 per cent in Italy, according to Eurostat. Of course, such data are affected by various statistical issues, including student numbers, but the scale of the problem is undeniable. Overall unemployment is also worst in Greece at 27.2 per cent and Spain at 26.7 per cent. Millions of young people are seeing their dreams crushed, with their only hope emigration, something which ever-larger numbers are embracing, especially from Spain and Portugal.
The equivalent unemployment rate for all adults of working age is 7.6 per cent in the US, 4.3 per cent in Japan and 7.8 per cent in the UK.
There are those, of course, who will blame all of this on “austerity”, as if spending even more and borrowing even larger amounts of money would somehow help. It won’t. It is vital to remember that there are two kinds of austerity – the good sort (cutting public spending on current expenditure) and the bad (hiking taxes). The first kind is public sector austerity; the second private sector. The EU has done too much of the wrong kind.
The Eurozone’s tax to GDP ratio rose from 39 per cent in 2010 to 39.5 per cent in 2011, which was silly. In France, one of Europe’s weakest links, the tax take shot up from 42.5 per cent to 43.9 per cent of GDP. There are many reasons for the jobs and growth crisis, including the existence of the single currency, macroeconomic mismanagement and a long list of other errors. But rising marginal tax rates on labour and capital are one under-appreciated cause of the problem.
In France, the implicit tax rate on capital surged from 39.7 per cent to 44.4 per cent in 2011. The implicit tax on labour income is 42.8 per cent in Belgium, 42.3 per cent in Italy and 40.8 per cent in Austria, crippling rates that substantially weaken the relationship between effort and rewards.
Several countries still levy a top marginal tax rate on income of over 50 per cent, including Sweden (56.6 per cent), Denmark (55.6 per cent), Belgium (53.7 per cent), Portugal (53.0 per cent) , Spain and the Netherlands (both 52.0 per cent) and Finland (51.1 per cent) – and that is even before France beats everybody else with the maddest, most incentive destroying and pro-job relocating tax code seen for many a year.
There is a solution, even without leaving the euro. Those countries that have bitten the bullet and slashed their costs are doing well. Unemployment is falling in several economies, including Latvia, Estonia (now just 9.4 per cent) and Ireland (down to 14.1 per cent). The problem with internal devaluations, however, is that they can lead the real debt burden to shoot up uncontrollably.
Capital Economics estimates that prices would need to fall by 23 per cent in Greece, 12 per cent in Italy and six per cent in Spain and Portugal to restore competitiveness. That would send the Greek national debt to an unsustainable 170 per cent of GDP by 2020, triggering another default and financial collapse; Italy would also find this process very tough. One thing is certain: there is no easy way to defuse the catastrophic time-bomb that is the Eurozone.
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