Will Europe's unemployed pay the price of single currency?

Tony Barber on an obsession that unites Europe - unemployment

ALL OVER Europe, the cry is going up: create more jobs! Terrified that public opinion is increasingly blaming high unemployment on the European Union's plan to launch a single currency in 1999, EU leaders are searching urgently for ways to put people back to work.

"Serious efforts across Europe to fight unemployment are needed to make European integration acceptable for the average citizen," said Antonio Guterres, Portugal's recently elected Socialist Prime Minister.

From the opposite end of the political spectrum, France's Gaullist Prime Minister, AlainJuppe, added: "We have a common obsession - jobs."

Germany's centre-right coalition government has set itself the formidable task of halving unemployment by 2000, and in Sweden the Social Democratic Finance Minister and prime minister-in-waiting, Goran Persson, has outlined the same objective. The centre-left Belgian government said last Thursday it would hold talks with employers and unions on 12 February on "an ambitious contract for jobs".

There has been no comparable flurry of activity in the EU since its foundation in 1957, but then the scale of the problem is unique, too. Almost 18 million people, or 10.6 per cent of the workforce, are unemployed in the EU's 15 member-states, and in Germany, where 4 million people are out of work, the jobless numbers have reached levels last seen in Hitler's time.

Obviously, the picture varies from country to country: the Spanish jobless rate of almost 23 per cent is far worse than the Dutch rate of 7 per cent. But overall the EU's record on jobs compares unfavourably with those of the United States, Japan and non-EU European countries such as Norway and Switzerland. What unites most EU governments - Britain's Tory administration predictably apart - is the worry that more and more people are drawing a connection between unemployment and the politically sacrosanct ideal of ever closer European union.

Job-conscious Europeans are asking if the Maastricht treaty's strict conditions for countries preparing for monetary union are helping to entrench unemployment rather than reduce it.

"If we cannot curb unemployment, the whole European process is in danger," said Monika Wulf-Mathies, the German member of the European Commission responsible for regional policy. She called last Friday for changes to the Maastricht treaty so that the EU can concentrate harder on creating jobs.

One commonly heard argument is that Maastricht is forcing governments into a deflationary policy of budget deficit reduction at just the moment when the European economy needs a dose of expansion to return people to work. Worse still, it is said, once the single currency is in circulation, national governments will be restricted in their ability to reduce unemployment because they will no longer control exchange rate and monetary policy and will be barred from running occasionally large budget deficits to prime their economies.

One of the few available ways of getting out of a recession in the era of the Euro, as the single currency was christened last December, would be to cut labour costs. This could mean lower wages or slimmer welfare, social security and holiday entitlements.

It is a source of immense frustration to the EU that such ideas have taken hold of the public imagination even though many economists question their validity. "The fear of unemployment is sapping confidence in the single currency. This fear is not justified," Jacques Santer, the president of the Commission, told the European Parliament last Wednesday.

Hans Tietmeyer, the chairman of Germany's powerful central bank, the Bundesbank, observes that unemployment is "mainly a structural problem" - that is, a problem requiring more flexible labour markets, reforms of the welfare state and the removal of what he calls "disincentives to work". By far the best way to achieve a sustainable increase in jobs is to raise Europe's competitiveness and entrepreneurial spirit, he argues.

In contrast, there is a growing belief among left-of-centre politicians and voters that the EU model designed at Maastricht is one that may suit central bankers and big business but does far too little to address the chief concern of ordinary citizens - finding and holding down a job. Some of those most closely involved in the 1991 treaty negotiations - above all, Mr Santer's predecessor, the French Socialist Jacques Delors - now confess that it was a mistake not to have tackled the issue of employment at Maastricht.

EU leaders, already worried that Europe's economic difficulties may force a postponement of the Euro's planned launch in January 1999, accept that public support for monetary union is essential if the project is to succeed. This, in turn, requires governments to show their electorates that they can deliver more jobs in the next three years despite the rigid Maastricht conditions.

If they fail to do so, it is quite conceivable that the Euro will not get off the ground. Lamberto Dini, Italy's outgoing Prime Minister, puts it bluntly: as long as unemployment is so high, monetary union is "unthinkable".

To qualify for the single currency, governments must bring their budget deficits down to 3 per cent or less of gross domestic product and public debts to 60 per cent or less. They must also meet strict targets on low inflation, low interest rates and exchange rate stability.

It is the deficit and debt criteria that are proving hardest for governments to fulfil - so hard that at the moment only Luxembourg, which contains 0.1 per cent of the EU's population, meets all Maastricht's conditions. But no EU member-state (except, it seems, Britain once again) is happy at the prospect of being left out in 1999, and so most governments have embarked on the unpopular course of squeezing public spending and pruning their welfare systems.

But it would be unfair to blame Maastricht for everything. Whether or not the treaty existed, EU governments would need to reduce their deficits and reform their social security systems, some of which, like France's, would otherwise simply go bust.

Moreover, unemployment was a serious European problem long before Maastricht was even heard of. If it seems to be growing more acute, this is partly the consequence of ferocious commercial competition from countries able to undercut the EU through cheaper labour costs. It is the EU's misfortune that the attempted move to a single currency has coincided with several unrelated trends: a slowdown in the European economy, a deepening crisis in the generous welfare systems established after 1945, and more intense global competition. Public opinion is seizing on monetary union as a scapegoat for Europe's ills because it is the most visible project to which the EU is committed.

The French and German governments, which last week announced relatively modest initiatives for jobs and growth, are praying that the European economy will begin to turn around in the middle of this year, causing unemployment to fall steadily as the deadline approaches for the Euro's launch. If 1997 is a good year for growth, France, Germany and the Commission will be in a stronger position to rebut charges that monetary union is bad for jobs, and the participating countries can be nominated as planned in early 1998.

Clearly, it is a strategy with pitfalls. If evidence accumulates that unemployment is not coming down this year and next, the outlook for the Euro may be bleak indeed. (Graphic omitted)