Unemployment across the main three economies in the region – France, Germany, and Italy – remain dangerously close to double digits. More worryingly, unemployment among the youth of society, a sector that should be at the dynamic forefront and driving the economy, is even higher. Rigid employment laws and governmental interference in small business enterprises make entrepreneurship difficult. The potential growth rate in Europe is estimated at 2 per cent. In the US, growth is above 3 per cent and employment is below 5 per cent. It seems that where there is heavy employment regulation there is also high unemployment.
The most recent attempt in France to address some of the rigidity in the labour markets was met by pestiferous public hostility and the plans were subsequently withdrawn. The law was in many respects flawed, but the situation illustrates how difficult it will be to make the region’s economy more productive and dynamic, when such reforms are politically unsavoury.
In Germany, the level of unionisation in the industrial sector is in comparison to say the US large and the unions wield considerable power. In many cases, large companies are obliged to have union members on their main board. Historically, the large unions have demanded inflation busting wage increases, and threaten employers with worker unrest to achieve their aims. While the power of the unions has diminished somewhat in recent years, heavy unionisation remains a barrier to new investment into the region.
The Italian manufacturing base is centred on the textiles and footwear industries and the emerging asian textiles and footwear industries are flooding the global market with cheap goods. Despite protectionist measures announced by the European Union to impose import tariffs on emerging Asian goods, the movement away from high cost European producers to low cost Asian producers is unlikely to reverse.
It’s true that Europe may be able to achieve its potential growth rate of 2 per cent against a backdrop of global growth. However the concern is that unless it addresses the fundamental and structural problems inherent in the economy and concentrate on markets where they have a competitive advantage, Europe’s ability to compete economically with the likes of the US and Asia over the coming years and decades is likely to be limited.
Gareth Isaac, fixed income fund manager, Axa Investment Managers.
