European growth and jobs in 2010

14 January 2010

Fabian Zuleeg, EPC Chief Economist, said economic forecasts in 2008 had failed to take governments’ and institutions’ policy responses into account. While the overall economic situation has improved, there is a real possibility of a ‘double-dip’ recession, with further deterioration of labour markets in 2010.

Although unemployment has been lower than forecast, government debt levels are worse, and Europe could be “moving into a form of stagnation”. To return to pre-crisis conditions governments must substantially reform their financial sector and reign in their deficits and debts.

Given the socio-economic challenges, such as globalisation, demographic changes, resource scarcity, cohesion and integration and climate change, it is unclear when governments will be able to afford to run large surpluses to service their debts.

István Székely, Director for Economic Studies and Research in DG ECFIN, European Commission, said the EU’s economic climate is improving, but several challenges remain including debt levels that will rise to 80-85% by 2011, and reduced growth potential.

EU unemployment will continue to rise in 2010 to over 10%, but will start to fall in 2011, although differing national labour market policies result in major differences in unemployment, so Germany retained workers on reduced hours, while Spanish companies shed workers during the crisis.

Governments must avoid retaining rigid labour markets, as this prevents people moving into new growth sectors, and governments must restore growth potential. EU2020 measures are boosting innovation and job creation.

Jørgen Elmeskov, Deputy Chief Economist and Director, Policy Studies, Economics Department, OECD said financial conditions have eased and share prices rebounded, so by mid-2010 financial markets should almost “resemble normality”.

World trade is helping drive recovery, with external buoyant demand boosting OECD exports. The bottoming out of house prices and the return to positive inventories also help recovery.

Interest rates are “close to the floor”, and unlikely to increase in 2010 and very low inflation will continue. Fiscal policy is “in a mess” with government debts likely to exceed GDP by 2011. Only 50% of OECD countries have given details of how they will lower their debt levels, but they should tighten areas, such as pensions, which do not directly affect the economy.

Göran Hultin, EU Affairs Advisor at Manpower, said three-quarters of countries are recording higher employment levels than in the previous quarter and as the economy picks up skills shortages will rise. As labour markets are now global, China, USA and Germany have had similar employment trends in the last few years, although China’s outlook is now more robust.

The UK has negative net employment, although it has improved slightly over the previous quarter; in France trends are positive, but few employers laid off staff, but in Spain and Italy net employment is down 11% and 6% respectively.

The employment outlook is stable but fragile, with labour markets adjusting to the fallout of the economic crisis. Future concerns will be the long-term unemployment of low-skilled workers, high youth unemployment and re-introducing laid-off older workers into the labour markers.