Why EU Unemployment Will Stay High For A Long Time

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Includes: SIEGY, VLKAY
by: Jacob Steinberg

With 17 million people without jobs in the region, the eurozone is currently "enjoying" its highest unemployment rate since the inception of the fiscal union more than 10 years ago. The unemployment rate is up from 10.7% last month to 10.8%. Germany's unemployment rate is at 5.7%, whereas Spain's unemployment rate is over 23%. The fact is, there is a very high possibility that unemployment rate will cross 11% in Euro zone before the year ends and I don't see a jobs recovery in Europe anytime soon. Here is why:

Wages are not competitive: Euro zone countries have the highest cost for low-skill labor in the world, with the exception of Germany. For example, the minimum wage in France is €1,321 per month. Considering that a work week in France is 35 hours, this comes down to $12.50 per hour. On the other hand, Germany has no minimum wage and hourly wages can go as low as €2 per hour. Most eurozone nations can't compete with Germany or the emerging markets in wages, and many jobs move to these markets as a result.

Culture is not innovative: When it comes to art and literature, Europeans may be very creative, however when it comes to business and industry, Europeans have trouble with innovating, again with the exception of Germany. It's not uncommon for young people in Europe to live with their parents or collect government checks for many years, until they are finally able to find a job. For example, in Italy, 30% of all unmarried people between ages 20 and 30 still live with their parents. In other parts of the world, young people are more likely to start their own business if their job search fails than in Europe.

Governments are engaged in austerity measures: Rather than making structural changes to debt problems, many European nations simply chose to cut their expenditures and implement relentless austerity measures. Of course, this didn't play well in these countries where 40%-60% of the economic activity is composed of government spending. If government lays off thousands of employees and businesses don't hire them, what happens to those individuals? Many times, an employee who spent his or her whole life working for government will have trouble adjusting to working for a private/public company, as culture, pressures, priorities and motivations are very different in government agencies and businesses.

Conclusion

I believe that the European economy is losing its edge against the emerging nations and the US, with the exception of Germany. The old continent isn't doing enough to reinvent itself and falling behind. Even many European companies are moving their operations outside of the continent in order to cut costs. The continent grew too comfortable post World War II and its jobs situation is chronic.

One may argue that things aren't looking that great in US either, however US has an innovative culture and it can always reinvent itself to remain competitive. I don't believe Europe (outside of Germany) will have its own Steve Jobs or Mark Zuckerberg anytime soon, as the continent's current dynamics don't reinforce people like them.

For investors, I suggest staying away from companies whose revenues depend mostly in Europe. I also suggest buying Germany companies such as Volkswagen (OTCPK:VLKAY) and Siemens (SI), as these companies will continue to have the competitive edge compared to the rest of Europe.

Disclosure: I am long OTCPK:VLKAY.