Lagarde Calls on EU to Improve Youth Prospects

Declining incomes for European youth since the global financial crisis are dimming their prospects, and IMF chief Christine Lagarde urged governments to take action to ensure they do not fall further behind.

A new International Monetary Fund study showing that while average income inequality in the EU “has remained broadly stable there since 2007,” Lagarde said the data reveal “a worrying trend: the gap between generations in Europe has widened significantly, news outlets reported.

The International Monetary Fund deserves praise for a study about inequality in Europe which was launched at Davos on Wednesday. Rather than talking about disparities generally, the fund chose to concentrate this particular report on inequalities between generations. It’s hard to see EU countries becoming fairer unless they rebalance their tax spending priorities away from the oldies and toward the young.

The IMF report starts from a stark finding: Income inequality in the EU27—usually represented by a measure known as the Gini coefficient—has remained broadly stable over the last 10 years. In contrast, generational inequality has risen sharply: The share of over-65s and people aged 18 to 24 at risk of poverty was roughly the same in 2005 at around 20%. Since then, it has fallen to around 15% for the senior, and risen to nearly 25% for the young.

This finding shows that the European social safety net has done a very good job at protecting pensioners during the crisis. However, it has failed to support those who went through an era of high unemployment and wage stagnation. As Lagarde put it, “Without action, a generation may never be able to recover.”

The IMF has a long list of measures which could potentially help younger generations. These range from cutting taxes and social security contribution for younger workers, particularly those who earn less, to spending more on education and training. Some of these proposals are also rather ambitious: For example, the IMF says countries could lift wealth taxes. Since the oldies typically hold more assets, which they have accumulated throughout their working lives, this is a way to ensure the tax burden falls more heavily on them, while minimizing the risk of discouraging work, Bloomberg reported.

Redirecting Social Spending

Still, the IMF is less radical than it could be. The report addresses the importance of redirecting social spending towards benefits for those of working age, which can help those who face a spell of unemployment or precarious work. As the report notes, 60% of the increase in social spending in the EU since the crisis has been directed at old-age benefits.

IMF research shows that an employment gap can lead to longer-term wage loss or “scarring” that erodes potential earnings, she said. A worker with less experience is less likely to find a job, and those lost wages cannot be saved.

“Wages not earned and savings not put aside can be extremely difficult, if not impossible, to recover later in a person’s career,” she warned. That gap also can lead to rising levels of poverty among younger workers.

The solution, Lagarde said, is replicating policies such as those used in Germany and Portugal, including apprenticeship and training programs, and exempting first-time job holders from social security taxes for three years.

Measures to “create jobs and incentivize work” could include reducing taxes on low-wage workers, investing in education and training, and protecting younger workers with unemployment and non-pension benefits, AFP quoted her as saying.

Another strategy would be to focus on wealth taxes, which she said are lower today than they were in 1970, including inheritance taxes, to fund programs for younger citizens.

“Let me underline again: this is not about one age group versus another,” Lagarde said. “Building an economy that works for young people creates a stronger foundation for everyone” since young people with jobs with productive contribute to social safety nets.

Of course, asking pensioners to accept less will not be easy. Across Europe, older voters tend to turn up to the polls in greater numbers than their juniors. And since in several instances, younger voters favor anti-establishment parties such as the Five Star Movement in Italy, mainstream forces may have even fewer incentives to act.

Still, if EU governments are serious about addressing inequality, they must address youth poverty and exclusion. Concentrating on the wrong kind of disparity is like ignoring the issue completely.

“We can help heal the scars of the crisis.”