Europe Economy

Austerity Stifling Job Creation: Labor Organization

The International Labour Organization (ILO) called on European leaders to invest in their economies and make job creation their priority on Wednesday, as it released a new report which showed 3.5 million jobs had been lost since the 2008 financial crisis and a further 4.5 million were at risk.

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The report warned euro zone unemployment now stood at 11 percent, representing a total 17.4 million people.

The ILO warned if current policy did not change quickly it was possible this figure could rise sharply across the euro zone: "fueling social unrest and eroding citizen's confidence in national governments, the financial system and European institutions."

Unemployment among young people (those aged 16 to 24) was predictably highest among all those of working age.

Youth unemployment in April 2012 stood at 22 percent across the whole of the euro zone while in Italy, Portugal and Slovakia it was 30 percent.

In Greece and Spain youth unemployment stood at a staggering 50 percent.

The ILO said there was a growing awareness that fiscal austerity as a policy response to the euro zone crisis was, on its own, not enough, and that the policy was not only having a negative effect on job creation but was failing to stimulate investment or financial stability.

Swingeing cuts in public spending had, according to the report, led to a predictable decline in domestic demand but this had not been met by the forecast increase in exports to help stimulate growth and had meant most economies in the euro zone, with the exception of a very few including Germany, had suffered recessions.

Moreover, 13 of the 17 euro zone states had implemented flexible labor market reforms making it easier for employers to dismiss staff with no visible boost in job creation, merely increasing the number of layoffs.

"The austerity approach has sidelined the much needed reform of the financial system, the epicenter of the crisis. Indeed, action on this front has proceeded slowly," added the repot.

Banks had not resumed their role of providing loans to the real economy and private investment as a percentage of gross domestic product (GDP) had in fact fallen in 2011 creating further problems fo the overall euro zone economy which was reliant on the success of small businesses.

The ILO report called for a resumption of investment and reform of the financial system.

It said increased investment equivalent to 1 percent of euro zone GDP would create 1.4 million new jobs over two years.

Were the banking sector to resume lending to small businesses to the same level as before the crisis which would mean an increase in the investment to GDP ratio of less than 2 percentage points to 21.5 percent two thirds of the jobs lost since 2008 would be recovered.

The report said repairing the financial system meant addressing the solvency issues of many banks adding there was a strong case for banking union.

It said the euro zone summit at the end of June was a first step in the right direction but concrete measures were required.

The ILO outlined several policy responses it said were now necessary in order to successfully navigate a path out of the euro zone crisis.

Among the proposals were government backed youth employment programs similar to youth guarantee programs employed in Scandinavian countries which separate young people into three targeted categories: not in education, unemployed or with a short employment experience.

Coordinated national policies on wage rises in relation to economic productivity across all euro zone countries and increasing competitiveness was another recommendation, while continued attempts to lower budget deficits but through different measures such as taxes on certain property types or financial transactions was another proposal of the report.

The ILO warned the “window of opportunity is closing” adding the future of the euro hung in the balance.

It said a coordinated policy response, including greater cooperation between European leaders as demonstrated at the end of June and wage setting mechanisms which reflected productivity were fundamental to escaping the crisis altogether.