Eurozone nations hope for a permanent recovery

Eurozone economy

Eurozone nations hope for a permanent recovery

After a painful depression the bloc is growing again but some worry that the crisis will have long-term effects in the jobs market

Alexandru is one of the luckier ones. A 24-year-old who emigrated to Italy from Romania at the age of 12, he has recently secured a job with a permanent contract as a printer at a typographer in a small town near Milan.

“It’s a good place,” he says of his new employer. “Now if I’m sick, they pay me. I have holidays, I have insurance. In the firm I worked for before, I didn’t have anything.”

Alexandru’s situation reflects a broader shift in Europe, where the depression in the jobs market is starting to reverse after almost a decade. The eurozone jobless rate has fallen below 10 per cent this year for the first time since the economic crisis gripped the continent, hitting an eight-year low of 9.3 per cent in May, and around 6m more jobs have been created since early 2013. The recovery has been broad, with Spain and Portugal — two of the hardest-hit countries — experiencing a sharp fall in unemployment since the nadir of the region’s financial troubles.

There is still a long way to go, however. In Voghera, a town close to where Alex lives about 50km south of Milan, youth unemployment rates remain high. For many of those who have work, it is insecure and short-term.

“Out of every 10 of my friends, only one works. It’s not a good situation for my generation,” Alex says. He and many of his friends still live at home with their parents. “When I talk to them about the past it sounds better. They all had a job and the opportunity to have a family.”

The recovery in the eurozone’s labour market has taken economists by surprise. Businesses are creating jobs at a pace that few had foreseen. While there is little doubt that the region is getting back to work, there are big question marks about the quality of the jobs being created.

Wage growth remains poor, even in stronger economies such as Germany. There is evidence of high rates of under-employment, with many part-time employees wanting to work far more hours than they are given. And much of the work being created remains precarious, with temporary contracts the norm in many member states. Some experts suspect that the jobs crisis has gone on for so long that many would-be workers have given up and left the labour market for good.

And while policymakers at the European Central Bank have welcomed signs of a jobs recovery, concerns remain about the sluggish nature of the rise in wages — a key indicator of whether the economy is strong enough for them to begin winding down their extraordinary stimulus measures.

There is definitely a very significant increase in [the size of] the labour force,” said Mario Draghi, ECB president, last month. “At the same time, we have evidence that . . . many of these new jobs are so-called ‘low-quality’ jobs. We’re talking about temporary employment, we’re talking about part-time employment.”

Economists at the bank recently came up with a way to gauge underemployment, which includes part-time workers who would like more hours and those who have left the labour market altogether. By this measure, the rate of underemployment is as much as 18 per cent, or almost double the official unemployment rate.

ECB officials are confident that the wounds inflicted by the crisis will heal and the jobs market will strengthen over time. A mood of cautious optimism is being replaced by a more bullish narrative as the eurozone’s recovery gains in strength and breadth. Investors have pushed the major European indices higher, with the Euro Stoxx 50 up nearly 15 per cent so far this year. Mr Draghi’s comments last week drove the euro to a 2017 high against the dollar and pushed up yields on German 10-year Bunds, as markets reacted to the suggestion the ECB would unwind its stimulus policies if the recovery continued.

Sentiment has also been buoyed by the election of Emmanuel Macron as French president. Many hope Mr Macron can pass labour market reforms that will boost jobs and economic growth in the eurozone’s second-largest economy. France is unique in that it displays many of the characteristics associated with the region’s prosperous “core”, while facing the burden of high unemployment.

Despite the improved sentiment, Carsten Brzeski, economist at ING-DiBa, says there are few reasons to believe there will be a rapid recovery.

“The ECB seems to think the problems in the labour market are temporary. But it’s all a matter of definition. Temporary problems could remain temporary for quite a while,” he adds. “It is hard to see wages rising quickly over the next few years. ”

***

While officials debate wage growth, downtown Lisbon is bustling. Increasing numbers of tourists and a rise in the popularity of inner-city living — partly because of a wave of interest from French buyers, many of whom are retiring in Portugal to take advantage of favourable tax treatment for pensioners — have helped create a vibrant atmosphere in the capital.

The country’s economy is expected to expand about 2.5 per cent this year, according to the International Monetary Fund, comfortably outstripping average EU growth projections. Yields on 10-year government debt have dropped below 3 per cent, the lowest level in almost a year.

It is a sharp turnround from a few years ago. Portugal was blighted by economic troubles that in 2011 forced it into a punishing bailout programme, which cut public-sector wages and pensions. Unemployment rocketed, hitting a high of 17.5 per cent in early 2013.

Portugal’s case was typical of the jobs crisis that swept across the eurozone, particularly in the south. As is often the case in times of high joblessness, younger workers were hit hardest, with youth unemployment peaking at above 40 per cent in Portugal — and even higher levels in Spain, Italy and Greece.

The number of Europeans in jobs only rose above its pre-crisis peak in the first quarter of this year. Yet at 9.4 per cent in May the jobless rate in Portugal as well as other places remains much higher than in stronger economies, like Germany.

António Costa, Portugal’s centre-left prime minister, has been a much more successful manager of the economy than expected, confounding critics who said his anti-austerity drive and reversal of some of the labour market reforms would lead to another debt crisis. Wins for its football team in the European Championship last summer and in the Eurovision Song Contest also helped lift the national mood.

“There has been a psychological change,” says Catarina Sampaio, a 40-year-old architect working in Lisbon. “The message of the previous government was depressing and left people without hope. The spirit is different now, people are becoming more optimistic.”

The revival of Lisbon’s city centre has led to a sharp rise in property prices. Ms Sampaio says there is a risk that the benefits of the city’s revival are not being equally shared. “I’m getting more work this year, but it is not to do with the gentrification. The gentrification is like a parallel world that we don’t enter.”

She says companies are benefiting from a system of so-called “recibos verdes”, or green receipts, that enable them to avoid giving staff longer-term contracts of up to three years — though in some cases workers’ social security contributions are covered. The Portuguese government is looking at ways to address this problem and aims to shift more than 100,000 vulnerable workers into roles with permanent contracts.

“I’ve lived in precariousness since I finished my architecture degree. I’ve never worked for a company and I’ve never had the benefits that come with working for a company — I’ve had to pay them myself. My situation is common; most of us are self-employed now,” says Ms Sampaio.

“But this is a new type of precariousness. Conditions have always been like this for a lot of construction workers, now it is the same for architects too.”

Her experience is echoed around the region. Of the 5.2m jobs created between the second quarter of 2013 and the final quarter of 2016, 2.1m have involved temporary contracts. The proportion has been higher in Mediterranean economies.

***

Economists hope that as the recovery takes hold businesses will feel confident enough to offer workers longer hours and permanent contracts.

“We need to be patient,” Mr Draghi said. “We know that the labour market slack is actually tightening, the output gap is closing and we know [that with] all these factors in the end, their effects will fade away. The job quality will improve, productivity will increase.”

In parts of the eurozone’s periphery, however, there are concerns that the scars of the crisis are permanent.

Michele Fontefrancesco, an economic anthropologist and honorary fellow of Durham University, says: “Jobs have been getting more precarious in Italy since the late-1990s. What is becoming more and more common in Italy and other Mediterranean countries is the erratic movement of workers from firm to firm.”

He adds: “It’s becoming harder and harder to access professions with social capital. You study for three or four years longer than your father and you earn less money than him.”

For Agnese Bellieni, a 31-year-old resident of Alessandria, in Italy’s north-west, years of education are failing to pay off, and the eurozone recovery feels intangible. After finishing her doctoral studies in literature her dream was to become a full-time teacher, but in recent years she has been bogged down in a series of continuous but part-time, precarious work assignments — from market research, to Latin and ancient Greek tutoring — that, at best, have earned her €1,500 a month.

“I know some people who have started working more, but I do not feel like things have changed much,” Ms Bellieni says.

She lives with her young child and husband, who also does many temporary jobs, in a property that belongs to his parents. “Otherwise we couldn’t make it,” she says. “I would like to have more stability, on an economic and emotional level.”

Ms Bellieni says many Italians of her age are deciding to leave the country, discouraged by their prospects. Others simply lose hope. But she says it is crucial to remain in the labour force. She even accepted a low-paying teaching job an hour away in a small mountainous village just for that purpose. “Those who are determined and don’t get demoralised will make it sooner or later. Those who give up will not.”