Euro Zone Jobless Rate Hits New High

Unemployment in the region reaches its highest point since the currency crisis began and shows the economy buckling as a result of weak demand.

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The euro zone’s unemployment rate has risen to its highest point since the currency union began, providing further evidence that the region’s economy is buckling under the strain of its fiscal burden.

The jobless rate was 11.2 percent in June, up from only 10 percent a year before and 11 percent in March, Tuesday’s figures revealed. In Spain the total inched up even further to 24.8 percent — the highest of any major western economy.

In Spain and several other peripheral euro zone states, joblessness has become one of the key drivers of the debt crisis, simultaneously increasing the burden of public spending on social welfare and reducing the government’s ability to fund this through tax revenue on households’ earnings. Tax receipts collected by Spain’s central government dropped by 3.5 percent in the first half of this year.

The unemployment figures reflect weak demand from consumers and souring sentiment among businesses, which are reluctant to take on workers because of expectations that the market for their goods and services will remain weak for the foreseeable future.

The euro zone’s survey of business and consumer sentiment, released Monday by the European Commission, showed falls in confidence among consumers, retailers and service businesses, but most of all industrial companies — providing further gloom to follow last week’s survey of purchasing managers that suggested manufacturing activity is drying up at its fastest pace in three years.

“Labor markets in the peripheral economies remained weakest,” said Jennifer McKeown of Capital Economics, the independent macroeconomic consultancy. “With survey measures of hiring pointing to more broad-based weakness to come, the euro zone unemployment rate has further to rise, suggesting that consumer spending will remain weak.”

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The details of the unemployment data also underline structural flaws in several peripheral member states’ labor markets. Unemployment for the under-25s is more than 50 percent in Spain and Greece, and above 30 percent in Italy, Portugal and Slovakia. Economists blame rigid rules, which make it difficult for businesses to lay off existing employees. This leaves them unable to hire new, younger workers who might have more up-to-date skills. Even those younger people who manage to find work in countries such as Spain and Italy are often recruited on short-term contracts that allow termination of employment much more easily than for older workers on permanent contracts — which leaves them the first to lose their jobs when a company is in trouble.

Largely because of this two-tier labor system, the euro zone gap between youth joblessness and overall unemployment has widened as the slump has continued, from 10.5 percentage points to 11.2 percentage points over the past year.

This deeply rooted inefficiency is hampering companies’ productivity, and therefore their output, profitability and competitiveness — with a deleterious effect not only on national economies and their sovereign debt markets, but also on the long-term attractiveness of equities.

Spain and Portugal, and perhaps most of all Italy under its technocratic premier Mario Monti, are midway through reforms aimed at resolving this and other labor market inefficiencies.

However, that leaves the even more urgent conundrum of how to address low overall unemployment caused by weak demand.

Peripheral bond yields and equity markets had been supported in recent days by expectations that Mario Draghi, the European Central Bank president, would announce emergency measures to suppress soaring sovereign yields after its monetary policy meeting Thursday. Analysts regard a renewal of the ECB’s erstwhile purchases of bonds in the secondary market as the most likely policy action — and Tuesday’s poor jobless numbers increase the pressure on the ECB to authorize this because they underline the currency union’s poor fundamentals.

Another option for the central bank is to cut its benchmark interest rate, which at 0.75 percent is above the levels set by the Federal Reserve and Bank of England. Although Tuesday’s provisional estimate of euro zone inflation shows that it stubbornly remained at 2.4 percent for the third straight month — above the 2 percent upper end of the ECB’s targeted range — most analysts think the rate will fall in the coming months. This is largely because high unemployment will keep down demands for wage increases — reducing the pressure on companies to respond to wage increases by raising prices.

A cut in the ECB’s interest rate would likely aid export-focused companies by reducing the value of the euro.

Euro zone equities and peripheral government bonds lost some of their recent gains on Tuesday, in response partly to the poor unemployment figures and fears about corporate profits. The Eurofirst 300 index sank 0.9 percent to 1,063, and the yield on 10-year Spanish bonds rose 13 basis points to 6.78 percent.

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