Germany fears revolution if Europe scraps welfare model

By Ingrid Melander and Nicholas Vinocur

(Reuters) - German Finance Minister Wolfgang Schaeuble warned on Tuesday that failure to win the battle against youth unemployment could tear Europe apart, and dropping the continent's welfare model in favour of tougher U.S. standards would spark a revolution.

Germany, along with France, Spain and Italy, backed urgent action to rescue a generation of young Europeans who fear they will not find jobs, with youth unemployment in the EU standing at nearly one in four, more than twice the adult rate.

"We need to be more successful in our fight against youth unemployment, otherwise we will lose the battle for Europe's unity," Germany's Schaeuble said.

While Germany insists on the importance of budget consolidation, Schaeuble spoke of the need to preserve Europe's welfare model.

If U.S. welfare standards were introduced in Europe, "we would have revolution, not tomorrow, but on the very same day," Schaeuble told a conference in Paris.

Prime Minister Mariano Rajoy of Spain, where youth unemployment is among the highest in Europe, called for the euro zone to triple aid to small businesses and allow governments to subsidise the hiring of younger workers without sanctions for overspending.

In recent weeks Germany, wary of a backlash as many in crisis-hit European countries blame it for austerity, has taken steps to tackle unemployment in the bloc, striking bilateral deals with Spain and Portugal.

"We have to rescue an entire generation of young people who are scared. We have the best-educated generation and we are putting them on hold. This is not acceptable," Italian Labour Minister Enrico Giovannini said.

Rajoy said both the European Investment Bank and European Central Bank should do more to help credit flow to small firms.

Small and medium-sized companies in Spain and much of southern Europe pay much higher rates for loans than their counterparts in the north. Youth unemployment in Spain is above 57 percent as layoffs continue in a deep recession.

"With all respect for its independence, I believe the ECB can and should do more," Rajoy said in a speech at the end of the conference, also saying funds channelled to small firms via the EIB should be boosted to 30 billion euros (25 billion pounds) a year.

He called for "some kind of common European debt" and said Europe should temporarily exclude social security subsidies for youth hiring from its calculation of member states' budget deficits, a proposal that will likely meet resistance.

German ECB board member Joerg Asmussen said on Monday it would be a mistake to "tinker with the growth pact" to ignore certain investments for budget deficit calculations, as favoured by some in the EU who want public investment excluded to help them meet fiscal targets.

NO QUICK FIX

Aside from Rajoy's proposals, ministers offered few concrete plans, insisting Europe must be pragmatic and work on various strands. Schaeuble said this was why Germany had also decided to strike deals with countries such as Spain and Greece.

"Let's be honest. There is no quick fix. There is no grand plan," said Werner Hoyer, head the European Investment Bank.

German ministers said Europe must continue on the path of structural reforms to boost its competitiveness as well as make good use of available EU funds, including 6 billion euros that leaders have set aside for youth employment for 2014-20.

The youth employment crisis will be a central theme of a June EU leaders' summit, and German Chancellor Angela Merkel has invited EU labour ministers to a conference in Berlin on July 3.

In March 2013, nearly 40 percent of under-25-year-olds in Portugal were jobless, and in Greece youth unemployment shot to a record 64 percent in February, while it was below 8 percent for Germany and Austria.

Following up on an idea aired earlier this month, French President Francois Hollande urged the euro zone to work towards a joint economic government with its own budget that could take on specific projects including tackling youth unemployment. /Reuters

(Additional reporting by Fiona Ortiz in Madrid; Writing by Ingrid Melander; Editing by Giles Elgood and Will Waterman)