Europe has to start investing in people instead of destroying its growth potential if it wants to create more and better jobs.
Europe still finds itself struggling to get out of the crisis. About 26 million Europeans are unemployed and almost half of them are long-term unemployed. The increase in long-term unemployment is of special concern and can turn into structural unemployment and lower growth potential in the future.
The European Commission has relied on austerity measures to reduce public deficits but has underestimated how big an impact austerity measures would have on the economies of member states and recovery has been slower than expected.
Austerity measures have generally resulted in lower public investments but private business investments are also low. The low level of private investments is of great concern because if firms do not invest in new machinery and equipment, it will be harder to increase productivity and new technology may not be introduced. Eventually the growth potential of the whole economy may as a consequence become lower in the future because machinery and equipment may simply be outdated.
The consolidation process has been ill designed from the beginning because no thought has been given to the significant spillover effects. Labour market reforms may well be needed in many parts of Europe but if one wants to obtain the full welfare gain of these reforms it is vital that the crisis does not damage the growth potential of the economy. A different approach is therefore needed.
First, fiscal consolidation in Europe needs to be delayed and more balanced. The troubled countries need more time and countries within the EU should not consolidate all at the same time. Also countries that do have room for maneuver, should increase public investments or stimulate private investments. This not only helps in the countries that actively pursue such a policy but it also helps troubled countries that do not have room for maneuver.
It is also possible to increase taxes in a balanced way and use the raised revenue for investments and still create millions of jobs in Europe. It is however important to be aware that increasing income taxes may have some offsetting effects on labour supply and productivity. Therefore it is better to raise taxes on dwellings than on income.
Second, funds need to be raised to increase private investments. This could be done via the European Investment Bank and the structural funds.
Finally, it is important to focus more on active labour market policies that aim at increasing the educational level of low-skilled workers. Skilled and high-skilled labour have a much closer and tighter attachment to the labour market, and education is one of the key drivers of increased productivity and increased wealth. Studies also show that both education and active labour market policies can play an important role in reducing inequality.
If Europe wants to create more and better jobs we have to start investing in people instead of destroying our growth potential.
Photo credit main picture: Clever Wall Mural in Yellow Springs, Ohio / JR P via Flickr