Europe's Lost Generation

Includes: FXE
by: George Liu

Economic hardships continue to pile up on the Eurozone. Although businesses are feeling more bullish, Eurozone consumers are still reluctant to spend. And although bond yields of troubled countries such as Spain have recently been stabilized by the ECB's aggressive monetary policy, credit crunches continue to paralyze businesses in the southern half of the Eurozone. The IMF recently downgraded its economic forecast for the Eurozone yet again, this time expecting a 0.3% decrease in GDP. In the first three months of 2013, the Eurozone economy contracted for a sixth consecutive quarter and is now facing record high unemployment numbers.

The weakening economy has had a profound impact on various aspects of European society. In Greece alone, deep cuts in healthcare programs have resulted in a significant increase in HIV infections, the delaying of crucial anti-mosquito spraying programs, and the return of malaria, which had previously been eradicated in the 1970s. Suicides and depressions are also on the rise across Europe as government investment in healthcare is cut, despite evidence that public health spending provides one of the best returns on investment for the economy.

One of the largest social costs of austerity is its impact on youth. Across the EU, overall youth unemployment is 23.5 percent, although 55.9 percent of Spanish youths are unemployed and, in some parts of Greece, youth unemployment reaches nearly 75 percent. Youth joblessness is estimated to cost the Eurozone €153bn in unemployment benefits, lost productivity and lost tax revenue but perhaps more important is its intangible costs.

High youth unemployment is particularly troubling considering that prolonged youth unemployment results in "scarring" effects that translate into higher risks of unemployment and poverty in the future. Youth unemployment is also translating into widespread social discontent, which in turn has fueled huge protests such as the riots in Greece and the "indignado" movement in Spain. Huge disparities in youth unemployment in Germany (8%) compared to other Eurozone countries (59% in Greece) has also resulted in widespread anger directed at Germany, which many youths view as only looking out for itself in the Eurozone crisis. Moreover, the widespread disillusionment of an entire generation of European youth could endanger the very concept of the Eurozone itself as future European leaders grow up with overwhelmingly negative experiences of European "unity." As noted by German Finance Minister Wolfgang Schaeuble,

We need to be more successful in our fight against youth unemployment, otherwise we will lose the battle for Europe's unity.

The severity of crisis has led many to dub Europe's youth the "Lost Generation."

Recently, Eurozone leaders are starting to take small steps to address youth unemployment. The Youth Guarantee, approved in April, aims to:

ensure that all young people up to age 25 receive a quality offer of a job, continued education, an apprenticeship or a traineeship within four months of leaving formal education or becoming unemployed.

As part of the guarantee, the New Deal For Europe, funded by €6 billion from the European Investment Bank, will offer unemployed youth catering jobs in Germany. A special credit line from the European Investment Bank is also being established for small businesses, which hire the bulk of youth in Europe.

Although these measures are in the right direction, they are cosmetic at best. Eurozone ministers have amped up the rhetoric on the youth unemployment crisis, but, apart from the New Deal For Europe, have offered no concrete plans to use the €21 billion set aside for the Youth Guarantee. Moreover, the €21 billion, barely 0.45% of the Eurozone GDP, had already previously been set aside for EU structural funds. The funds are simply being moved around, akin to putting "old wine in new bottles." The €6 billion set aside for the New Deal For Europe is spread across 6-7 years and is woefully inadequate to combat the crisis; however, it is significant enough to give German Chancellor Angela Merkel some political padding as she runs for a third term in the September elections.

Much more needs to be done to address the Eurozone's economic problems. The Youth Guarantee and the New Deal for Europe are small signs of an increasing emphasis on programs that promote growth, but there needs to be an overall shift from a focus on deficit reduction to economic growth. The harsh pace of austerity cuts to government spending has significantly decreased aggregate demand in the Eurozone, pulling it further into economic misery. It's sad that it's taking a lost generation to finally start waking Eurozone ministers up to the economic damage austerity measures have done.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.