The Guest Blog

The No.1 Priority: Job Creation in Europe

Moorad Choudhry, Head of Business Treasury, Global Banking HKSCKPVIamp; Markets, Royal Bank of Scotland

The debut album from The Clash included a track called I’m So Bored with the USA….substitute "euro zone" for "USA" and the band’s record company could re-issue that song as a single today.

The EU leadership lurches from one euro-related crisis to another, and while it is not necessarily 100 percent certain that Greece will default and/or leave the euro , the current arrangement is clearly not tenable and something has got to give soon.

Otherwise the entire EU is in grave danger of remaining in a permanent semi-recessionary state.

We need a dénouement, of one form or another, as soon as possible. Until then we will try to focus on other topics of importance.

Wednesday’s UK unemployment figures showed another increase, and it currently stands at 8.1 percent on a claimant count basis. Youth unemployment stands at nearly 1 million.

Elsewhere in the EU the situation is much, much worse. In some parts of Spain the youth unemployment figure is approaching 50 percent. There is a similar picture throughout the EU and in the USA.

This is a significant waste of resources, quite apart from the negative social consequences, and a major drag on growth. It also adds considerably to the welfare spending burden.

President Obama’s economic stimulus package announced last week had much to commend it, and a large part of it focused on job creation.

Its one downside was its cost – hundreds of billions of dollars, which will ensure it receives a rough ride through Congress. But at least it is targeting the right area.

We need to see much greater emphasis on job creation from EU governments, and not necessarily in the Keynesian manner either. After all, EU governments are struggling with budget deficits, simply throwing money at the problem is not a viable solution – but nor is it necessarily the right one.

Governments can "create" jobs in a non-Keynesian manner. The first thing to do is generate incentives for private sector companies to hire more staff. For example, employer payroll taxes could be suspended for every new worker taken on, especially if they are from the youth or long-term unemployed sector.

This is only a “cost” to the government in an accountant’s opportunity-cost foregone sense.

A payroll tax on someone who is not hired isn’t going to be collected by the government, and for every new hire the government will benefit from that person paying taxes (and not drawing dole money).

This is surely the first measure to introduce. And let’s not skirt around this solution.

Not just the first 10 hires for a start-up company, or a payroll tax freeze for six months, but an all-encompassing withdrawal of tax-related non-wage labor costs for all companies, for any new hire that is currently an unemployed resident. The benefits will far outweigh the “costs”.

Other measures might include non-financial incentives for companies to hire more staff, such as an initiative in Cyprus recently that established a state prize for corporate social responsibility, based on the number of unemployed new hires.

Of course, there is room for Keynesian-style job creation as well. For example, one could bring forward infrastructure and capital projects that are going to be undertaken anyway.

Government budgets are tight, so why not finance with a bond issue that is linked to a specific project? This would provide some investor comfort and so should be easier to get away for fiscally-challenged sovereign authorities, especially if the capital project raised revenue (a toll road, for instance).

And public funding to support re-training and job mobility will always be useful.

But the most important measures are those that create incentives for companies to take on more people. Reducing unemployment must surely be the number one priority for all Western governments, and it is about time that we saw more effort expended on this issue.

If EU governments spent 10 percent of the time they spent discussing the euro, Afghanistan and Libya on a serious effort to reduce unemployment, the quality of life for EU citizens would improve markedly.

Dr Moorad Choudhry is Head of Business Treasury, Global Banking & Markets, Royal Bank of Scotland, and Visiting Professor at London Metropolitan University.