Europe's labour lessons

14 Jan 14
At last, the Eurozone’s longest recession is over, but there is plenty still to do — not least to get unemployment levels back under control. Minouche Shafik, Deputy Managing Director of the IMF, says deeper integration holds the key to a more prosperous development path

14 January 2014

At last, the Eurozone’s longest recession is over, but there is plenty still to do — not least to get unemployment levels back under control. Minouche Shafik, Deputy Managing Director of the IMF, says deeper integration holds the key to a more prosperous development path.

Europe, as a continent, a people, a trading bloc, has not lacked for challenges in recent years. The economic and social devastation wrought by the financial crisis has echoed across the region — from capital city to village, boardroom to factory floor — scarring economies and leaving millions of Europeans unemployed. Finally, though, GDP growth of 0.3% in Q2 2013 ended the contraction. Now, the process of rebuilding has begun.

Nemat Shafik, universally known by her nickname “Minouche,” is closely observing, and seeking to influence, this process. The former Permanent Secretary of the UK’s Department for International Development has, since April 2011, served as Deputy Managing Director of the IMF, a role that fully utilizes her deep experience and perspectives on both economic and development issues.

“The recent decisions, especially the actions taken by the European Central Bank, have taken away the fear that the Eurozone was going to break up, and I think that’s an important achievement,” she says. However, this relief only goes so far. After all, there remains a huge amount of ground to make up: in the 18 months prior to Q2, GDP in the currency zone fell 1.5% to stand 3.5% below the pre-financial crisis peak in 2008, while unemployment has climbed to over 12%. Some individual countries have fared far worse: unemployment in Greece and Spain has surged to 27% and 26% respectively — truly, a social and human tragedy on an epic scale.

Europe at a crossroads

In our global economy, one in which both business and governments are interconnected more than ever before, Shafik is clear that the road to sustainable recovery will be long and difficult, with many challenges for policymakers to negotiate. “I think Europe now faces a very stark choice — a choice of stagnation or a choice of a much higher growth rate that would require much deeper levels of integration,” she says. “So we’re at a bit of a crossroads.”

Despite the recent bout of more positive economic data, she fears that the stagnation scenario remains plausible. “Currently, the financial markets are very fragmented, and small and medium enterprises in countries such as Spain and Portugal are paying incredibly high interest rates for their borrowing,” she points out. “You can imagine a scenario where households, firms and governments under huge debt burdens would reduce demand and not contribute to any recovery, and you can imagine a situation where structural reforms stagnate. That is a scary scenario.”

But is it likely? Shafik is pleased to say that she suspects not. This is for a variety of reasons, but, in principle, because it is not politically or socially viable; neither policy-makers nor European citizens themselves would allow it to happen. “I think the choice is stagnation or a much more ambitious integration agenda,” she says, even though divergence within the Eurozone has become more marked than it has been since the early 2000s. This means, in her view, taking steps such as completing the banking union, setting out compelling balance sheets that finally convince the markets that Europe’s banks are sound and to have a paced approach to fiscal consolidation.

Getting labor working

As the Eurozone enters a period of relative calm, the time is right for new approaches to be applied to address the high unemployment rates that continue to plague so many European countries. The IMF, which is made up of 188 countries and whose tasks include promoting high employment, has an important role to play.

“I think one of the things that strikes you when you look at the differences across Europe is that the countries that have reformed their labor market policies are the ones that have seen gains,” says Shafik. “Recent reforms in Spain, for example, are starting to bear fruit. Another thing is that many countries are reforming their pensions systems, so we have seen a significant increase in labor force participation for those aged between 55 and 62. This means employment levels in that age group are going up because reforms in pensions systems have incentivized people to stay in the labor market.”

But for Shafik, the key point to make is that whatever the level of development of a country, the countries that have suffered the most in terms of high and rising unemployment are those that have also suffered the severest drops in economic growth. “This means that job one for solving the unemployment crisis in Europe is to provide growth,” she says. “There are also some special things you can do to young people where the problems are very severe in many countries. We’ve suggested things such as having flexibility on minimum wages for young workers so they can get their foot in the door in their job market, as well as linking employment protection to seniority, so that firms are not burdened with very high costs of labor protection until workers have the necessary experience.”

Shafik, who is one of four deputy managing directors at the IMF, has succeeded in combining a meteoric career progression (she has also been the youngest vice president of The World Bank and part of the senior management team of the International Finance Corporation) with a busy and active family life — she has twins and three step-children. But this is not the case for many women, a fact that has not gone unnoticed by Shafik.

“Many countries in Europe, such as Italy for example, have an incredibly low female participation rate in their labor force, especially when contrasted to the Nordic countries,” she says. “The key issue is not so much the wage, but challenges such as affordable child care and tax policies, which provide incentives for women to stay in the workplace and having supportive men at home. These kinds of things can have a huge impact.”

Despite the challenges ahead, it’s important to note that she remains optimistic about the region’s future. “I think it is important to acknowledge that, throughout the crisis in the last couple of years, we’ve consistently underestimated Europe’s political willingness and commitment to the European project,” she says. And if they continue their journey toward deeper integration, sustainable growth and much-needed higher employment will surely follow.

This feature was first published in the December issue of EY's Dynamics

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