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Jan 10, 2024

Why Low Unemployment Is Causing Big Problems for Europe

Even during the current economic downturn, unemployment rates are still relatively low in France and Germany. But unemployment is no longer a good indicator of the health of Europe’s economy.

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When Emmanuel Macron and Olaf Scholz addressed their nations on New Year’s Eve, both underlined one thing. Despite the economic challenges “we continue to create jobs,” the French president boasted. “Never have so many men and women in Germany had a job,” the German chancellor bragged.

Behind this success, however, lurks a Europe-wide story often overlooked: The low unemployment numbers, in France and Germany, have a lot to do with the baby boomer generation going into retirement.

Europe morphing into a Florida on the Mediterranean—part theme park, part nursing home—has many consequences. The great retirement means Europe’s economic and political weight in the world will further erode. Since 2010, the GDP of the United States has grown by 8 percentage points more than that of the European Union. More than half of that difference can be attributed to demographic differences.

More elderly also means more health and pension spending weighing on government budgets. It’s anyone’s guess how EU member states will be able to respect the recently reformed EU fiscal rules when pensioners become an ever-larger share of the voting population. But one of the most overlooked consequences of the continent’s ageing is that mass unemployment—Europe’s prime political problem since the two oil shocks in the 1970s—no longer dominates politics in much of the continent.

Baby Boomer Bust

Let’s start with Germany: Europe’s biggest economy has been stagnating since 2018. The five-year stretch is the worst for the continent’s largest economy in more two decades. Yet in contrast to the end of the 1990s, when Germany was already dubbed the “sick man of Europe,” the long bout of economic stagnation has hardly produced any unemployment.

Germany’s jobless rate stands at 5.9 percent. This is higher than its historic low of 5 percent in 2019 before the pandemic hit. But it is a far cry from the 12 percent in 2005. Moreover, a big chunk of the recent rise in unemployment can be explained by the over one million Ukrainians that have found refuge in Germany, which are included in labor statistics.

How to explain the seeming paradox? Just as Germany’s economy entered stagnation mode five years ago, baby boomers started to retire. In 2017, 65.3 percent of German residents were of working age. By 2022 this had dropped to 63.8 percent. Between 2018 and 2035, Germany’s working age population is forecast to shrink by four to six million. Let that sink in.

A similar, if less dramatic, story of a decreasing workforce can be told about France. Macron, of course, praises his labor-market reforms for bringing down unemployment from 10 percent in 2017 to the current 7.4percent. But the truth is that many French people retiring also helped. Between 2017 and 2022 the share of the working age population dropped from 62.3 to 61.5 percent.

No Lay-offs, No Reform

If ageing makes unemployment less of a problem, it contributes to a monumental shift for European politics.

First, for decades European politics has primarily revolved around fighting joblessness. But as labor becomes scarce, many old established political narratives become untenable.

In Italy, far-right Prime Minister Giorgia Meloni, who was elected by rallying against migration, recently announced Rome would issue 425,000 work permits to non-EU nationals until 2025. In Switzerland, employer’s associations want the government to punish part-time workers with a surtax. In general, politicians arguing for lower taxes on capital and against minimum wages will struggle if project fear unemployment is not credible.

Second, high unemployment has been the main trigger pushing politics to react to a worsening economy. People being on the dole creates two constituents for change: Many jobless citizens feel that without a job they lack money and a place in society. The working citizens find it unfair that they are financing the lives of the jobless.

But with lower unemployment, where is the political impetus for economic reform supposed to come from?

Take automaker Volkswagen as an example. VW announced in late 2023 that it won’t replace retiring workers in Germany, while boosting investments in China. “We must consistently understand the demographic curve as an advantage,” the company’s head of human resources, Gunnar Kilian, said, promising to use early retirement and part-time working schemes “to the maximum.” That explains why trade unions aren’t calling for strikes and Berlin is not protesting VW’s decisions to reduce its German footprint. Germany’s deindustrialization may advance without anyone getting laid off and thus neither trade unions nor politicians coming round to seriously objecting.

Shrinkonomics

The problem is: Just because we have lower unemployment doesn’t mean all is fine and voters are happy.

Textbook economics would suggest that in an ageing society, wages rise as workers are scarce. But in Japan—the laboratory of shrinkonomics—wages have stagnated for decades. In Germany, real wages have fallen by a mind-boggling 7.2 percent since the start of the COVID-19 pandemic.

Thus, it is hard not to see how Germans getting poorer amid inflation is contributing to the rise of the extreme right Alternative für Deutschland (AfD). And even in this situation, Scholz’ coalition government thinks balancing the budget is more important than relaunching growth. Could one imagine Berlin shifting to austerity if pictures of long queues at job centers were dominating the news? The situation in France is similar: Unemployment is low, but the far-right Rassemblement Nationale is polling at historic highs.

European politicians need to understand that unemployment is no longer a good indicator of the health of the economy or the happiness of voters. All the more as Europe’s economy has to undergo big shifts in coming years if it wants to remain afloat.

With an ageing population Europeans face a choice: Accept high immigration, lift workforce participation, deepen the EU’s single market, and pray for artificial intelligence (AI) to keep the economy growing. Or go the Japanese way: Have little migration, but very expansionary fiscal and monetary policies to help the country avoid degrowth.

What is clear today: Europe’s aging means future economic policy debates will differ a lot from those we have grown up with.

Joseph de Weck is INTERNATIONALE POLITIK QUARTERLY’s Paris columnist and author of Emmanuel Macron. The revolutionary president.

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