Editorial Board

Europe’s Youth Can’t Work Without Growth

Europe says it’s getting serious about reducing an epidemic of youth unemployment, an effort as laudable as it is overdue. German Finance Minister Wolfgang Schaeuble wasn’t exaggerating this week when he called the phenomenon a catastrophe for the European Union.

As of March, 59 percent of Greeks, 56 percent of Spaniards, and 38 percent of Italians and Portuguese ages 16-24 were unemployed, levels that if allowed to fester will permanently harm the generation that’s supposed to produce growth for an aging continent. The anger caused could eventually tear the EU and its currency apart.

Schaeuble was speaking at a conference with his French counterpart, Pierre Moscovici, on May 28 in Paris. Predictably, they’ve dubbed their program a “New Deal for Europe,” after Franklin D. Roosevelt’s Great Depression remedies of the 1930s. Details are still dribbling out, but it’s already clear that Europe’s youth program is no such thing.

The core of the effort is 6 billion euros ($7.7 billion) carved out of the EU’s budget. Some of this money (it isn’t clear how much) would go to the European Investment Bank, which would use it to back loans to small- and medium-size enterprises in countries such as Greece and Spain in exchange for commitments to hire and train young people. Some would go to helping young people move to find training and jobs. Germany has 30,000 unfilled training vacancies, according to the country’s labor minister. Germany is also organizing bilateral efforts to export its vocational training expertise.

These are all good ideas. The EIB is already getting a 10 billion euro boost to its paid-in capital this year to foster growth and employment in general, enough to increase annual lending by 40 percent to 70 billion euros over the next three years. The more, the better. Banks in Greece, Spain and elsewhere aren’t lending, so this kind of subsidy makes sense.

Yet the scale is still too small. Millions of new jobs are needed, and this initiative falls far short. We fear Europe’s politicians will use it to distract attention from their larger failure to fix macroeconomic policy.

The EIB’s president, Werner Hoyer, sought at the same event in Paris to lower expectations. He highlighted the core problem: the cost of borrowing in the EU’s periphery. A small- or medium-size business in northern Italy pays 2.5 percentage points more for a loan than its competitor just across the border in Austria, he said, creating “an unbeatable advantage” for the Austrian company. Only a banking union will address this problem.

Bear in mind, too, that youth unemployment in the most afflicted economies isn’t new. It had been rising faster than unemployment as a whole for decades before the crisis. It’s a chronic problem, and dealing with it will require multiple approaches -- German-style apprenticeships, Danish-style active labor-market policies to promote training, British-style deregulation and more.

The issue is complex. A recent paper by economists David Blanchflower and Andrew Oswald suggests, for example, that Spain’s homeownership rate of 80 percent is a factor: Lack of rental accommodation forces young people to live with their parents rather than move to where the jobs are. (Germany, Austria and Switzerland all have large rental markets and low youth unemployment.) Tax incentives for Spaniards to rent out their spare rooms might provide a quick remedy.

Better labor-market policies are all to the good, but it will take more demand and faster growth to get youth unemployment as low as it should be. If Schaeuble really wants to help, the main things he should do haven’t changed: Reflate Germany’s economy to create demand for exports from the periphery, and form a true banking union.