Austerity Weakening Euro Zone Economies

Rising unemployment threatens to undermine attempts to resolve the euro zone debt crisis.


Unemployment has risen to its highest level in the euro zone’s 13-year history, underlining the economic damage wrought by the single currency’s most serious crisis yet.

In the short term, Friday’s news of a continuing climb in joblessness will make it harder to resolve the euro zone debt imbroglio, since it will sap families’ willingness to spend — weakening the economy and depressing government revenue.

In the longer term too, the euro zone’s lackluster labor market could harm the euro zone’s ability to put its public finances on a sound and sustainable footing by returning to decent levels of economic growth. Research suggests that workers who have experienced unemployment become permanently more prone to drop out of the labor force even much later in their working lives — adding to their country’s fiscal burden rather than easing it through income tax. This danger is particularly acute if they were jobless for a long period while young.

Klaus Baader, chief European economist at Société Générale, described Friday’s news of a further rise in the youth unemployment rate to 21.7 percent as “a particularly disheartening piece of evidence.” He added, “Consumer sentiment continues to suffer, largely in response to a predictable increase in fears of unemployment.”

Friday saw a slew of downbeat numbers from the European Union statistical agency Eurostat and the European Commission.

Euro zone unemployment rose by 50,000 to 16.4 million in November. At 10.3 percent it is almost 2 percentage points higher than the latest U.S. number, also published on Friday. The tally of unemployed people under 25 climbed by 67,000 to reach 3.4 million — more than a fifth of young people.

Consumer sentiment fell for the sixth straight month in December, according to the European Commission survey — hit by the specter of joblessness. Retail sales, which tend to rise and fall in line with consumers’ view of the future, dropped by 0.8 percent in November.

The euro zone’s recent unemployment figures confirm the economic bloc’s two-speed economy, which political observers think may hinder a resolution of the euro zone debt crisis.

German unemployment is at a 20-year low of 3 million. It has been progressively pushed down in recent years by labor market reforms such as a tightening of eligibility for sickness benefits, and by Germany’s continued economic growth despite a slump in much of the rest of the euro zone. Germany’s relatively healthy economy has encouraged many of its citizens to think they should not shoulder the burden of clearing up the euro zone’s economic farrago because they did not cause it. Germany’s unemployment rate is only 6.8 percent and falling, according to December estimates.

By contrast, Spanish unemployment is at 23 percent and rising — and almost half of Spanish young people do not have work. Unemployment is also steadily increasing in countries as diverse as Portugal and the Netherlands. For most of the euro zone’s history Holland has been considered one of its strongest bulwarks, but the latest output figures show the Dutch economy shrinking in response to weakening euro zone business conditions. The Dutch unemployment rate reached 4.9 percent in November — up almost a percentage point from June.

Responding to Friday’s gloomy numbers, yields on 10-year Italian bonds — which have become a bellwether for investor sentiment about the euro zone debt crisis — rose 10 basis points to 7.19 percent. Economists fear that the longer rates stay above 7 percent, the higher the risk that they will rapidly escalate out of control.