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Requiem for a Lost Generation?

A realistic, integrated and equitable adjustment program needs to be put in place for the whole Eurozone. This program must put the interests of Eurozone's citizens ahead of those of its banks and politicians.

If you are between 16 and 25 years old and live in Europe today, then life isn't easy. You face a high probability of being unemployed. If you are lucky enough to have a job, you are likely to be paid less than your skills are worth and work long hours. You will probably face job insecurity and have little prospect of career advancement because your job is either temporary or part-time. You pay high taxes but the state provides low quality goods and services. If you want to move out of your parents' house or need a loan to start a business, buy a car or, God forbid, buy a house, the banks will charge you a high rate of interest. This is because you are on low income and carry a high risk of default. And the icing on the cake is that your social security contributions will not even ensure you a reasonable pension when you retire.

Has a Faustian bargain been struck in Europe between politicians and banks? Is Europe saving the banking sector at the cost of the well-being of its citizens, especially the young? One can't help but think of Francisco Goya's painting "Saturn Devouring His Children" which depicts the Greek myth of the titan Saturn (or Cronus) who ate each one of his children after their birth...

European policymakers have been actively engaged in saving the banks (they call it saving the Euro). They argue that since banks are too big to fail, we all must pay for their mistakes. After all, we all benefited from cheap credit, didn't we? So, now it is fair that we suffer and pay the price. But the truth is that European banks got into trouble because they failed to do the job they were supposed to: manage and monitor risk. They lent excessively to states, households and firms that were already highly indebted. They used too much leverage to increase their profits, thereby overly exposing themselves to the risk of a default by these debtors.

So far, the policies implemented by Europe's political elite have led to massive income and wealth redistribution away from workers and savers and into the coffers of the banks. Firstly, austerity has forced many European countries to impose harsh tax increases in order to service their debts to banks. Secondly, banks have access to funds from the European Central Bank at an historical low cost but charge high interest rates on new loans. The monetary transmission mechanism has been broken and many countries are subject to credit shortages.

Not surprisingly, these policies have caused a sharp contraction in economic activity in Europe. The burden of this contraction has fallen disproportionately on the shoulders of the young. According to Eurostat, the percentage of young people aged 16 to 25 without a job in 2012 is 55.3% in Greece, 53.2% in Spain, 37.7% in Portugal, 35.3% in Italy, 30.4% in Ireland, and 24.3% in France. These rates are expected to increase even further in the near future.

However, youth unemployment has not risen everywhere in Europe. While the overall rate has risen, it has declined in recent years in Germany and has been stable in a number of countries, including Austria, Finland, Netherlands and Sweden. So why is youth unemployment so much worse in Southern Europe than elsewhere?

The answer to this question can be found in Ambrogio Lorenzetti's frescoes in Palazzo Pubblico in Siena, Tuscany. These frescoes are known as the Allegories of Good Government and Bad Government. In loco, in the summary description of the Bad Government fresco we read: "Bad Government (...) concerned with protecting its own interests rather than the Common Good is aided by the worst vices. In order to pursue its selfish plan it has neutralized justice, disenfranchising its rules and its very dignity. Bad government produces decisive negative effects (...) and a fundamental fear in citizens who see danger to their property, their activities and their lives, compared to the safety and guarantees of Good Government."

After the introduction of the Euro, politicians in Southern Europe became more interested in maximizing their private rents rather than undertaking the necessary structural reforms needed to stimulate growth and keep their countries competitive within the Euro framework. They promoted inefficient public investments in infrastructures in order to serve their personal interests and the interests of the lobbies who supported them (and who often employ them when they leave office). They designed financially unsustainable welfare states. They made electoral promises to their citizens that they knew could not be kept.

And today? It appears that Bad Government is endemic. All European policymakers need to be honest and acknowledge what they already know: austerity measures in the South have proven self-defeating. Southern Europe is falling deeper into recession while its public debt to gross domestic product ratios are fast approaching insolvency levels. Without a policy U-turn, youth unemployment will continue to rise.

Recently François Hollande and other European leaders announced that programs would be put in place to fight youth unemployment. However, these promises are like pulling the wool over the electorate's eyes. The amounts involved are grossly inadequate compared to impact of the ongoing and planned austerity policies.

A realistic, integrated and equitable adjustment program needs to be put in place for the whole Eurozone. This program must put the interests of Eurozone's citizens ahead of those of its banks and politicians.

Firstly, the core must take on an expansionary fiscal policy (lower taxes) to stimulate private demand and help the periphery export its way out of recession. Interest rates are close to zero for the core countries so there is no danger in doing this. Secondly, debt burdens in the countries currently under adjustment programs must be brought back to solvency levels via debt restructuring. Thirdly, debt restructuring implies that some banks will incur heavy losses so a banking union with a bank resolution mechanism must be put in place to protect depositors.

Not doing this implies eating alive our offspring thus condemning Europe to being trapped in an abyss just as Saturn and his generation eventually were. And then a new order of gods emerged and ruled from someplace else. The requiem for a lost generation will turn out to be the requiem for Europe.

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