This content is from: Portfolio
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.

The euro zones
unemployment rate has risen to its highest point since the currency union
began, providing further evidence that the regions 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, Tuesdays 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 governments ability to fund
this through tax revenue on households earnings. Tax receipts collected by
Spains 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 zones 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 weeks 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.
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 ECBs
erstwhile purchases of bonds in the secondary market as the most likely policy
action and
Tuesdays poor jobless numbers increase the pressure on the ECB to authorize
this because they underline the currency unions 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 Tuesdays 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 ECBs 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 ECBs 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.