Hamish McRae: Why the EU has been unable to create jobs

Unemployment is Europe's catastrophe. Many aspects of the European economy over the past half-century have been a triumph: rising standards of living, good working conditions, high productivity and good leisure provision. It is generally a competitive economy by world standards, for it includes what was until last year the world's largest goods exporter, Germany – which is now second to China. France has, quite aside from being the world's top tourist destination, the highest productivity per hour in the world. Italy has excellence in craft industries, Scandinavia in telecommunications and so on.

So Europe is not uncompetitive. It is just not very good at creating jobs. Unemployment is high by developed world standards: the eurozone average of 10 per cent is higher than the UK, Canada, Australia, Japan, and even a little higher than the US. It has also been persistent. For example, between 1995 and 2005 the average level of unemployment in France was 10.6 per cent.

In addition, employment levels (that is, the proportion of people of working age in a job) have, with the principal exception of Scandinavia, been relatively low. One of the aims of the Lisbon Agenda, the plan started in 2000 to make the EU a more effective economy, was to increase employment levels. The results, even before the recession, have been disappointing.

It is true that the European economy did reduce unemployment during the boom years, but progress was uneven. Worse, many of the new jobs were temporary, creating a two-tier job market. Older workers were "insiders" with heavily protected job rights and very good pension benefits. Younger workers were "outsiders", many of them unable to find permanent jobs and so forced to juggle with a series of short-term or part-time contracts. While some countries have been able to use part-timers effectively – the Netherlands has done well on this account – in others many young people have been shut out of full-time employment.

Why has this been allowed to happen? There is a short and brutal explanation, though not a complete one. It is that well-intentioned labour legislation designed to protect the rights of people already in work has undermined the willingness and ability of employers to create new jobs. So countries with weaker protection, the UK being a good example, have been better at generating employment. (In the past three months – despite the rise in unemployment claimants – we created 300,000 jobs; the EU created none.)

But this is not the whole answer. Part of the problem is the wider one that in an ever more global world, jobs can be "off-shored" to India or China. People with the very highest skills are always in huge demand, while there are some less-skilled jobs that physically have to be done locally. But in the middle there is a band of jobs that are disappearing. Matching skills to opportunities was always going to be hard. Some countries within Europe have found it harder than others.

Then came recession. Some parts of Europe have coped well: Germany, Sweden. For others recession has been a disaster: Spain has 20 per cent unemployment. And while the European economy as a whole has been growing in recent months it is clear that recovery is far from secure.

The UK faces a particular challenge: tackling what is proportionately the highest fiscal deficit not just in Europe but in the developed world. There will be job losses in the public sector. So can the private sector take up the slack?

We cannot know the answer to this, and in any case it is not a simple transition, even though at the moment private employers have coped well with the downturn. What we do know is that dealing with the employment impact of this shift back to fiscal stability is one of the great challenges the Coalition faces – and one that we as a society have to try to manage as well as we can.