Members of the Club

All the drama surrounding Europe’s debt crisis has prompted a great deal of discussion about which countries are fit for membership in the club –should Greece stay, should it go from the Eurozone., etc. But the economic crisis has both overshadowed and exacerbated problems of another sort in Europe - whether countries meet the minimum requirements of a democracy to belong to Europe.

Yesterday a referendum was held in Romania to try to oust center-right President Traian Basescu, organized by his rival, the center-left Prime Minister, Victor Ponta. It failed only because it was unable to attract 50% of the voters but 80% of those who did vote were in favor of recall, at least in part because of unhappiness of the dire economic situation in Romania which has seen tax increases, a currency losing value against the Euro, and a 2009 bailout by the IMF with heavy conditionality.

The political turmoil has in turn exacerbated the economic situation since the uncertainty over governance has frightened international and domestic investors in a country where investments depend on the backing of the state. More important, however, is the way in which politics are being conducted. The political machinations that have undermined the Constitutional Court, intimidated the judiciary, and led to emergency decrees to place the recall on the ballot, have called into question the rule of law in Romania.

In a scathing report by the EU published 10 days ago, the Commission noted:

"[T]his report is adopted at a time when important questions are raised with regard to respect for rule of law and the independence of the judiciary in Romania. Overall progress [in terms of judicial reform and anti-corruption] has to be assessed in the context of a wider social recognition of key principles such as the rule of law, and the independence of the judicial process as part of the checks and balances of a well-functioning democracy. A well functioning, independent judicial system, and respect for democratic institutions are indispensible for mutual trust within the European Union, and for gaining the confidence of citizens and investors.

The Commission considers that recent steps by the Romanian Government raise serious concerns about the respect of these fundamental principles. These steps took place in an overly polarised political system where mistrust between political entities and accusations are a common pattern; however this political context cannot explain the systematic nature of several actions. While certain actions may be partly explained by this political polarisation, they raised serious doubts about the commitment to the respect of the rule of law or the understanding of the meaning of the rule of law in a pluralist democratic system… The Commission is in particular extremely concerned by the indications of manipulations and pressure which affect institutions, members of the judiciary, and eventually have a serious impact on society as a whole. [T]he current controversies pose a serious threat to the progress achieved so far and raise serious questions as to the future of the reforms already launched."

Romania is the second country (after Hungary) where alarm bells have gone off about a recent entrant's commitment to democratic principles that in theory are part of the admission price to the EU club.  Calls for increased monitoring and report writing by Brussels only serve to highlight the fact that as with EMU, the EU lacks any real mechanisms for persuading countries to follow the rules of a club to which they were admitted prematurely in the first place.

How Bad is Youth Unemployment in Southern Europe?

Youth unemployment in Europe has captured worldwide headlines during the crisis, with new highs being reported almost weekly.  The current figures paint a daunting picture in the south of Europe: in May, 52.1% of young people in Greece and Spain were out of work, with Portugal (36.4%) and Italy (36.2%) not too far behind.

This week, Steven Hill published a piece in the FT where he argues that these figures are simply not true and that such numbers are inflated because they include everyone not in the workforce, even those who are in training programs or in school (this is traditionally why youth unemployment figures are higher than the overall total.) He prefers to use the ‘youth unemployment ratio’, which is

# of unemployed youth____

total population aged 15-24

Using this measure, the numbers look quite different: Spain’s youth unemployment is 19% compared with 13% for Greece.  These figures are a little older than May so there may have some deterioration recently but the point is, that using the ratio, the situation doesn’t seem as dire.

Does it matter?  To a certain point, yes.  It gives us a better picture of life on the ground in the countries hardest hit by the crisis.  This helps explain in part why there is not the sort of social unrest that one might expect with over half the population out of work.  Southern European unemployment rates for decades have been hard to interpret.  In the 1980s, well before the boom years, Spanish unemployment was in the double digits but no-one really thought 16-18% represented reality because of the thriving underground economy.  In the last few months, a number of Spanish politicians have remarked to me that if total unemployment were really around 25%, there would be social chaos.

But from another perspective, it seems more of an academic debate.  Hill notes that the German youth unemployment ratio is 4.5%.  So, Spain’s level is still more than four times higher than Germany’s.  Plus, surely some young people in the South are in training programs and universities because there simply are no jobs – the classroom rather than the café as the refuge for the discouraged worker.

While much of the current debate centers on getting through the short term manifestations of the crisis – the bond yield roller coaster, for example, an important question is what the long-term implications of the crisis are for Europe’s struggling countries.  Young qualified workers are leaving. In the first half of 2012, Catalonia saw net out migration for the first time ever and was the Spanish region that lost the largest population – over 37,000 inhabitants.  The International Federation of Catalan Organizations estimates that the majority of those leaving are young, college educated people who in many cases are going abroad. Reducing unemployment by having young workers flee the country is not something many politicians would see as a win.

There are likely to be long-term demographic implications as well. Italy, Greece and Spain already have some of the lowest birthrates in the world.  Recessions typically have the effect of lowering the birthrate as couples delay childbearing until their economic situation improves.  Historically, this has not usually altered total fertility, just postponed it. But there is some reason to think that the protracted economic crisis may have far more serious consequences for the crisis of fertility in Southern Europe.

That is because these are also countries where the age at first birth is exceedingly high.  Spain, for example, has the highest age in the world at 29, with Italy close behind at 28.  Postponing childbearing under such circumstances is likely to reduce it further as women begin to push up against their biological clocks, in spite of advances in fertility treatment.

Lower birthrates  will mean rapidly aging populations and a higher dependency ratio.  Without large numbers of new immigrants, there will be fewer people of working age to pay for the elderly, which will in turn put greater pressures on the state and lower benefits.

So, while the common measure of unemployment may overstate the actual numbers of young people who are out of work, the job situation in Southern Europe is likely to have long-term consequences that lock the region into a vicious cycle. 

Europe of the Regions

The latest economic news out of Southern Europe with Spain’s borrowing costs hitting unsustainable levels and Monti’s fears that Sicily may be on the brink highlights an interesting angle on the euro crisis.  This is the role the regions and their financial woes play in the current crisis.  Some of the fears roiling Spanish markets today seem to stem from the fact that Valencia, the home of the world’s best paella, has applied for a bailout from the government in Madrid.  Valencia is not just the country’s most indebted region but it has become a poster child for wild excesses that left tax payers holding the bag for regional spending sprees that created little in the way of long term growth.

In Italy last week, Mario Monti expressed ‘serious concerns’ about Sicily's unsustainable debt level. There, the problem is more long term, related to corruption and extreme mismanagement of funds, if on a somewhat smaller scale compared to Spain’s most indebted regions. Even if the chances of a default there are relatively low, the case of Spain shows Monti is right to be concerned if markets overreact and drive Italian bond yields up.

As Europe has decentralized more powers to its regions, it has become harder for some governments to maintain control over their finances.  This is particularly true in Spain where regional autonomy is a powerful political force and the regions account for a third of the public sector deficit.

If part of the solution to the crisis is ‘more Europe’ as Angela Merkel has stated, that might also have to entail a little ‘less regions.’ While financially necessary, that will be a very tall order politically.