WASHINGTON—Two official reports issued earlier this month have dampened the economic outlook on both sides of the Atlantic. First, the U.S. Department of Labor indicated that the U.S. economy added only 115,000 jobs in April, which represents a slowdown from previous months and is well below what is needed to seriously dent staggeringly high unemployment. An astonishing 12.5 million Americans remain unemployed.  The situation is even worse in Europe, where the European Commission’s spring economic forecast, released on Friday, anticipated rising unemployment over the near-term. The average unemployment rate increased in 19 out of 27 EU member states in the year ending March 2012.

Take a closer look at the data, and the situation seems even more dire. While the U.S. economy added 201,000 jobs per month on average between January and April – a number on par with the best years of the 2000s – previous job losses have been steep. Add to the official figure the 7.9 million involuntary part-time workers and the 2.4 million who stopped seeking work in the previous four weeks and the picture becomes truly grim. Even more troubling and unusual for the United States, 5.1 million Americans are long-term unemployed, which means they have been out of work for more than six months. The average duration of unemployment remains around 40 weeks.

On the other side of the Atlantic, several European countries are struggling with jobless numbers that are extraordinary even for a continent familiar with persistently high unemployment. While the unemployment rate for the 17-country eurozone rose to its highest levels in 15 years in March, the average masks vast disparities. Spain and Greece are both reporting unemployment rates well above 20% and youth unemployment above 50%.  Along with Portugal, these countries alone account for 95% of the increase in EU joblessness since late 2010. And there is little reason for optimism in the short-term. With many countries relapsing into recession, the EU Commission forecasts that overall employment will deteriorate even further this year.

It would be dangerous to accept the current situation as the new normal or a necessary byproduct of painful economic adjustments. The long-term consequences of unemployment, often referred to as “scarring effects,” are dramatic. The deterioration of skills, loss of work experience, and social stigmatization lead to decreases in long-term earning potentials, often leaving workers with considerably lower salaries even 15 to 20 years after losing a job. For young people entering the workforce under such circumstances the prospects are especially daunting, as studies show a severely increased risk of recurring unemployment and diminished earnings throughout their careers. Significant and widespread negative effects on health, including on overall life expectancy, and on the families of unemployed persons are also well-documented.

Going beyond the level of personal tragedy, the unemployment trend represents bad news for the long-term economic and geopolitical prospects of the United States and Europe. High unemployment signifies a massive waste of economic potential in the near-term, and possibly even in the long-term. National, state, and local budgets are directly impacted both by diminishing tax revenues and increased spending on unemployment benefits, making the challenges of deficit reduction even more daunting. If today’s struggling youth, who are part of tomorrow’s tax base, suffer from lower potential earnings on a large scale, budgets will be impacted long into the future. Long-term unemployment threatens to turn cyclical problems into structural ones, possibly even raising the natural unemployment rate of countries. For Europe, there may even be severe political consequences; young people confronted with persistently high unemployment rates are unlikely to be strong supporters of the European project.

Even in the midst of austerity measures in Europe and tightening budgets in the United States, more needs to be done to prevent the current crisis situation from turning into the new normal. A first step could be to allow for a slower pace of fiscal consolidation in troubled countries such as Spain. As long as these economies are caught in a vicious cycle of deteriorating growth and rising deficits, they will not be able to escape the crisis. In the United States, this could translate into phasing in necessary budget adjustments over time and only after the economy has recovered further, while immediately increasing public spending in infrastructure and education through aid to states. This would create jobs in the short-term and help to tackle structural challenges in the future. An expansion of hiring credits – subsidies to employers that hire – could also help increase employment. In any case, a failure to address the jobs crisis now will make any necessary long-term adjustments increasingly difficult in the future.

Peter Sparding is Program Officer with the Economic Policy Program of the German Marshall Fund of the United States in Washington, DC. 

Image by Michigan Radio. 

WASHINGTON – On Sunday night, as buildings burned in Athens, Greek parliamentarians passed a new budget austerity package, demanded by creditors as a prerequisite for a new €130 bailout package. But eurozone finance ministers are now hesitating to approve their end of the deal in light of lingering questions about a €350 million hole in the Greek austerity plan and inadequate promises by Greek party leaders regarding the implementation of future austerity measures.

While the leaders of Greece’s main parties gave written assurances in the end, the level of distrust in Europe is high and rising. Patience is running out on all sides. With public opinion turning ever more sour in creditor countries, appetite for more help is evaporating. This is likely the last aid package for Greece. If it fails, Europe needs to have a fallback plan on what to do if Greece defaults on its debt, which now seems increasingly likely. And Greece will have even harder choices to make.

So, what are the chances of success for the new program? The Greek austerity plan is intended to bring down public debt to 120 percent of the country’s gross domestic product by 2020 — a level comparable to that of Italy today — by, among other measures, reducing pensions and cutting 150,000 public sector jobs in the next three years. Furthermore, structural reforms in labor markets and the tax system, wage cuts, and deregulation of industries are supposed to boost Greece’s competitiveness in order to attract investment and spur business startups. In short, these measures are meant to increase market confidence.

But wage and debt levels are not the only factor impacting confidence. The visible level of suspicion between European and Greek leaders certainly doesn’t help instill faith in a successful outcome to this Greek tragedy. As austerity measures are set in place, further eroding internal demand, the Greek economy continues its downward spiral following an already dramatic drop in GDP of 6.8 percent in 2011. With further cuts on the way and the political landscape in Greece growing increasingly volatile, it is hard to see how market confidence will return anytime soon.

On the contrary, as the dramatic late-night vote in Athens demonstrates, the success of the crisis management hinges on the ability of policymakers in Greece and elsewhere to continuously produce the “correct” decisions at the “correct” time. Despite much criticism about muddling through, European policymakers have thus far been successfully navigating such hazards. But, until permanent safety mechanisms are set in place and endowed with sufficient resources, crisis management remains highly vulnerable to unexpected shocks. These could come from Greece, such as failed parliamentary votes, as well as from other parts of the EU in the form of unsuccessful bond auctions or unforeseen turbulences in the European banking sector.

For Greece itself, the outlook even in the medium term is dire. It is true that Greek governments did not utilize the period of cheap capital after the country’s accession to the euro in 2001 to carry through much needed changes to the Greek economy. However, even if the new Greek program should succeed in decreasing public debt to the levels indicated — a possibility that is considered doubtful by many experts — it would still leave the country with potentially unsustainable liabilities. Structural reforms, while necessary, will not contribute much relief to the economic dilemma of Greek citizens in the short term. Their negative impacts, however, will be felt instantly. Other European countries that have undergone similar reforms did so over the course of many years. Whether democratically elected governments can continue to implement such dramatic reforms in such a short time frame and under the appearance of being pushed from the outside is doubtful. As long as a positive outlook for Greece is missing — or only visible decades down the road — it is reasonable to assume that Greek noncompliance with creditors’ demands may continue. This, in turn, will increase the reluctance of other countries to help in the future.

The situation in Europe remains precarious. Many pitfalls persist. A failure of the Greek bailout package is more than possible, and “good” solutions to the crisis no longer seem possible at all. For Greece, the choice seems to be between bad and worse outcomes. Some observers now seem more confident that the eurozone could withstand even a Greek default. If the Greek bailout proves ineffectual once again and social and political pressures in Greece continue to rise, this kind of test could befall Europe.

To avoid such an impasse, it will take more than just austerity measures. Instead of merely aiming at specific and unrealistic debt targets, a dual approach is needed. The first is smarter and more measured consolidation. For example, use a scalpel instead of a hatchet on education and infrastructure spending. The second is a serious roadmap for growth, including lowering barriers to capital and the utilization of further EU funds to spur investments.

That combination, done smartly and swiftly, could help to calm Greece’s lenders and  quiet Athens’ streets.

Peter Sparding is a program officer with the Economic Policy Program at the German Marshall Fund in Washington, DC.

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By Peter Sparding

WASHINGTON — In late June, U.S. President Barack Obama travelled to Carnegie Mellon University in Pittsburgh to launch a new $500-million initiative aimed at strengthening American manufacturing. This Advanced Manufacturing Partnership, a cooperation between industry, universities, and the federal government, will seek to identify areas of needed manufacturing investments. More generally, however, the initiative’s partners have, in the president’s words, the broader mission to “renew the promise of American manufacturing” and to help make sure that America remains “a country that makes things.” Achieving this “renaissance of American manufacturing” will require deeds, not just words.

Manufacturing has been in relative decline both in the United States and in many other developed nations for years. Its contribution to America’s gross domestic product has decreased from about 25 percent in 1947 to 11 percent in 2009. American manufacturing employment peaked at 19.6 million in 1979 and has generally been falling ever since. Today there are only about 11 million jobs left in the sector. Despite this, the United States remains the world’s largest manufacturer in terms of dollar value of manufactured goods. In the past year, American manufacturers have added nearly 200,000 jobs, the most in more than a decade, encouraging signs that suggest this sector can have a future. Still, persistent high unemployment in the United States — no small degree because of lost jobs in manufacturing — brings new urgency to the questions of where and how new jobs are going to be created. Services, once expected to provide those new employment opportunities, have not delivered.

For answers to America’s dilemma, some observers point to Germany, a country with a traditionally strong manufacturing sector that still “makes things.” Germany’s impressive economic performance coming out of the Great Recession, they say, is an example of how a modern economy can retain its industrial base and remain competitive even in the face of new manufacturing powerhouses in Asia and elsewhere. And indeed, despite stagnating population growth, Germany’s economy grew at a rate of 3.5 percent in 2010 and could expand by around 3 percent in 2011. Unemployment has reached the lowest level in 20 years, and manufacturing exports have risen sharply.

For sure, the German example comes with a number of caveats. So far, much of the country’s recent growth merely represents a significant rebound after experiencing a greater slump than many other nations during the economic crisis. In addition, Germany’s dependency on exports also makes it vulnerable to potential slowdowns in global demand, especially as unresolved problems in the eurozone are clouding economic prospects all over Europe, by far Germany’s largest export market. Furthermore, the increased competitiveness of the German economy has come at the price of dramatic wage moderation over the past decade, which, together with the strong focus on exports, has led to a neglect of domestic demand as a source of growth. It is far from certain that Germany’s current positive economic trends are sustainable.

Still, some lessons can be learned from the German example, especially regarding the future role of manufacturing. Germany’s manufacturing success is based on a number of factors, from a strong focus on advanced technologies to a balanced mix of small, medium, and large enterprises operating across a multitude of industrial sectors, creating regional innovation networks. Underlying all of this is a strong commitment to preserve and encourage key industries (and the accompanying production jobs) at home, even if parts of the manufacturing process are moved abroad. Additionally, there is a long-term emphasis on continued skills training for workers, strong apprenticeship programs, and other policies that specifically focus on employment. Germany’s “short-work” policy (Kurzarbeit), for example, allowed companies to keep their skilled workforce employed through the economic crisis by reducing hours while the government covered parts of lost salaries. This enabled the German economy to kick-start as soon as global demand picked up.

To boost American manufacturing, the government should introduce a number of new policies. First, a stronger focus on manufacturing employment is needed. Manufacturing jobs have functioned as the backbone of middle-class jobs in the United States for decades, fulfilling an important social function in times of a “squeezed” middle class. Focusing significantly more resources on continued vocational training and apprenticeship programs are first steps. Implementing short-term work schemes in the United States, while initially costly, would prevent some of the social costs of further unemployment during downturns while securing valuable worker skills. In addition, an even stronger focus needs to be placed on innovation. Manufacturing, which already is responsible for 70 percent of all private-sector R&D spending in the United States, is indispensable for innovation, as manufacturing and services, like research, design, and maintenance, are increasingly complementary. The notion that high-end R&D can thrive successfully on its own fails to acknowledge the importance of the actual manufacturing process to the development of new products, especially across subsequent technology life cycles. Defending and expanding public investments in research and development, for example through a permanent extension of existing R&D tax credits, will therefore be imperative even in times of austerity.

America needs to revive its manufacturing sector. There are lessons to be learned from the German experience. But, at the end of the day, although certain aspects of German manufacturing policies can inform and benefit the American debate, the “Renaissance of American manufacturing” has to be a “made in America” effort.

Peter Sparding is a Program Officer with the Economic Policy Program of the German Marshall Fund in Washington.

Volkswagen Factory Photo by ilovebutter

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WASHINGTON — With public finances in disarray following the financial crisis, recent political debate in Europe and the United States has focused on national debts. The ongoing crisis in the eurozone and daunting government deficits in the United States have added a sense of urgency. As the United States reaches its statutory debt ceiling and Europe seeks to prevent further debt crises, balanced-budget amendments, spending caps, and other debt-limiting proposals are under active consideration on both sides of the Atlantic.

Like Odysseus, who ordered his men to tie him to the mast so he could not be lured by the Sirens, some policymakers are proposing to tie themselves (and their successors) to stricter fiscal rules. The effectiveness of such proposals is being vigorously contested, with some seeing them as the only way to reign in growing deficits and others fearing the loss of legislative independence and needed fiscal policy tools in the future. The problem seems clear: if fiscal rules are introduced, they need to be strict enough to have an impact, but at the same time flexible enough not to limit future policymakers in times of economic downturn.

Proposals advocating strict and legally binding fiscal rules are not new. In the 1990s, in Europe, countries that entered the European Monetary Union agreed to the Stability and Growth Pact, which included a commitment to an annual budget deficit no higher than 3% of gross domestic product (GDP) and a national debt lower than 60% of GDP. Germany and France as well as a number of other countries have at different times broken these rules. In 2009, German political leaders went a step further in their attempts to “tie themselves to the mast” when the grand coalition introduced a “debt brake” into the German basic law. This constitutional amendment limits the federal structural deficit to 0.35% of GDP from 2016 on and does not allow the federal states to run any deficit at all after 2020. France and Spain have signaled an interest in adopting similar rules, but economists still disagree whether such stringent laws can be successfully exported.

Balanced-budget rules are not limited to Europe. In the United States, a vast majority of states have some variation of balanced-budget requirements. At the federal level, such measures have been introduced and discussed several times and have now, together with proposals on binding spending caps, resurfaced during the debate about the debt ceiling. The statutory debt limit itself differs from balanced-budget rules as it focuses on the overall debt and not annual deficits. But some members of Congress have signaled that they will only agree to raise the debt limit if a balanced-budget amendment is passed simultaneously. Others are demanding spending cuts as a prerequisite for their vote to increase the debt limit. The debt limit has thus become less of a fiscal rule and more of a political tool in a debate between liberals and conservatives over the role of government.

According to U.S. Treasury Secretary Timothy Geithner, the United States has nearly reached the current debt ceiling of $14.29 trillion but can extend it by implementing “extraordinary measures” until around August 2. There is little to no doubt among experts that raising the debt ceiling is economically necessary and will have to happen. Mark Zandi, chief economist at Moody’s Analytics, describes a failure to raise the debt ceiling as knocking out the cornerstone of the global financial system, namely “that the United States will make good on its debt payments.” Given that the debt limit has had to be raised ten times since 2001, political debates around the votes are not new and have previously been used by the opposition party to embarrass the administration. Then-senator Barack Obama himself voted against raising the ceiling in 2006, calling reaching the limit a “sign of leadership failure.” Still, today’s apparent determination on the part of some policymakers not to allow an increase under any circumstances makes the current situation more precarious. Despite the urgency of the situation, the debate about the debt ceiling has been merged with the broader political discussion about current and future U.S. budgetary policy. The debt ceiling is thus neither preventing the buildup of debt, nor helping to foster constructive policies.

Historically, most fiscal constraints have been circumvented and, in the end, proven to be ineffectual. Constitutional amendments, like the German “debt brake,” might prove to be more resilient, but, until they are tested during an economic downturn, this remains to be seen.  Either way, the economic wisdom of such amendments is doubtful. Finding solutions to the long-term challenges of public finances will require major political decisions, for example on the future design of social programs, levels of national security and public investment spending, and overall tax rates. These decisions will profoundly impact the future shape of societies and economies. They are inherently democratic choices. And budget rules will not produce sustainable and viable results without public engagement and understanding of what is at stake. Instead of passing the buck to future politicians (who may find ways to circumvent the rules), today’s policymakers and the public need to engage in a serious political debate about these issues now. Tying oneself (and future policymakers) to the mast of binding fiscal rules dodges tough decisions or abdicates the responsibility of actual political decision-making.

Peter Sparding is a Program Associate in the Economic Policy Program of the German Marshall Fund.

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