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Europe searches for mythical "jobs and growth" formula

Shoppers walk past a newspaper advertising board promoting its job supplement in Leicester, central England
Shoppers walk past a newspaper advertising board promoting its job supplement in Leicester, central England

By Luke Baker

BRUSSELS (Reuters) - Since the start of the year, one phrase has tripped off the lips of European leaders more than any other: "jobs and growth." After two years of debt crisis and budget austerity, there is a strong desire to shift the narrative on.

To that end, the EU's first summit of 2012, to be held on January 30, will focus on finding ways to kickstart growth and create jobs across the 27-country union, which is on the brink of recession and has average unemployment of 10 percent, rising to 45 percent among the young in countries such as Spain.

The problem is that after years of preaching austerity and telling wayward governments to cut spending and raise revenue, there is scarce capital readily available for investment, either at a national level or across the EU budget.

As a result, there is little expectation that Monday's summit will produce concrete measures to boost either output or employment in the near-term, despite EU leaders first adopting their competitiveness mantra more than a decade ago.

"They don't have much of a strategy apart from the typical laundry list of structural and labor market reforms, which is fine, but that is not going to deliver much in the short-term," said Guntram Wolff, deputy director of Bruegel, a Brussels think-tank whose analysis frequently informs EU policymaking.

"It's become clear that this focus on austerity and fiscal consolidation is not enough, so they need the economic growth and employment element. The signal is the right one, but we need to do better about how we go about achieving it."

While there may not be readily accessible pools of capital to launch infrastructure projects or other labor-intensive schemes that can boost output, the EU does have large amounts of funds squirreled away in its long-term budget that could be released to help countries such as Greece, Spain and Portugal.

Spanish Prime Minister Mariano Rajoy said on Thursday that any leftover money in the EU's structural funds should be used to generate jobs.

There is also a need to create more stability in the banking system so that banks have the confidence to lend to small- and medium-sized companies, the biggest engine for job creation in the EU, delivering up to 85 percent of new jobs since 2000.

The European Central Bank's flooding of the bank sector with nearly half a trillion euros of cheap three-year money - an offer it will repeat in February - has helped in that regard.

The summit is also expected to see leaders commit to making it easier for young people in struggling countries such as Portugal and Greece to travel abroad to seek work in high-performing economies like Germany, Denmark and the Netherlands.

"I want us this time to focus on immediate action to be taken in the specific areas of youth unemployment, the single market and SMEs," Herman Van Rompuy, the president of the European Council and the chair of EU summits, wrote in an invitation letter to EU leaders on Thursday.

"In the present economic situation, we must continue our efforts to ensure financial stability and fiscal consolidation: this is necessary in itself, but it is also a condition needed for returning to structural economic growth."

Greece, Portugal, Spain, and to a lesser extent, Ireland, still face a year or two of economic strife as severe austerity measures rip into growth prospects, a Reuters poll showed. Portugal and Greece will both shrink by more than three percent this year it predicted.

For Germany, which looks like it will steer well clear of recession while many of its partners succumb, the focus remains structural reforms rather than hard cash.

"Sustainable growth in European economies is not something that one can buy with public money," a senior German official said on Thursday. "Sometimes it requires political courage to take the steps necessary to create a foundation for sustainable growth. We need structural reforms."

DANISH MODEL?

Denmark, which holds the presidency of the EU until the end of June, has been held up as an example of a country that chose a particular path for investment and largely delivered.

Two decades ago it set out to turn itself into a champion of green technology, investing heavily in alternative energy sources including wind turbines. Danish turbine maker Vestas is now a world-leader in the field.

But one of the pitfalls of the strategy was laid bare this month when Vestas announced it would have to cut more than 2,300 jobs - 10 percent of its workforce - to restore profitability as it faces stiff competition from China.

In the economic downturn stalking Europe, the higher cost of investing in alternative energy sources is a barrier for cash-strapped governments - even if it may be the future - and as a result industry-leading companies can suffer.

In terms of a pan-EU growth strategy, therefore, analysts say Europe needs to look at an industry that is critical across all countries and will require large amounts of investment to deliver jobs, efficiency and expansion over the long term.

One natural candidate is the energy sector.

"They need to think about a typical investment project that has a strong European component, such as the energy transition story," said Bruegel's Wolff. "It's a long-term story, but on the other hand, the adjustment we're going to see in southern Europe is going to take 5-10 years anyway."

The key will be finding the money to invest. At a national level, that means focusing on what policymakers are calling "smart austerity" - cutting budgets but not in areas where investment is critical. That could mean defense and some social spending being cut so more resources are available.

At an EU level, it means unlocking structural funds, money set aside in the union's long-term budget to help bring poorer countries' infrastructure up to EU standards but which is not always used by recipients. For example, Greece has around 15 billion euros of unused funds from the 2007-2013 EU budget.

In a letter setting out their aims for the summit, France and Germany raised the possibility of pooling up to 25 percent of unused money from 2011 in a special growth fund, although they didn't say how much that would add up to.

Some estimates show that there is about 12 billion euros of unused capital in the European Financial Stabilisation Mechanism, a 60 billion euro fund that is underwritten by the EU budget and has been used to help bailout Ireland and Portugal.

On his Facebook page, Austrian Chancellor Werner Faymann proposed using 10 billion euros ($13 billion) in dormant EU social funds to help put young people to work.

The money would appear to be there. The challenge is unlocking it and putting it to work so results are delivered.

(Additional reporting by Michael Shields in Vienna and Noah Barkin in Berlin, writing by Luke Baker, editing by Mike Peacock)

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