Business

Eurozone unemployment rate hits new high in October

  • 30 November 2012
  • From the section Business
Unfinished commuter development in Madrid
Image caption Unemployment is highest in Spain, partly due to the collapse in the property market

The eurozone's unemployment rate hit a new record high in October, while consumer price rises slowed sharply.

The jobless rate in the recessionary euro area rose to 11.7%. Inflation fell from 2.5% to 2.2% in November.

The data came as European Central Bank president Mario Draghi warned the euro would not emerge from its crisis until the second half of next year.

Government spending cuts would continue to hurt growth in the short-term, Mr Draghi said.

'Two-speed Europe'

The unemployment rate continued its steady rise, reaching 11.7% in October, up from 11.6% the month before and 10.4% a year ago.

A further 173,000 were out of work across the single currency area, bringing the total to 18.7 million.

The respective fortunes of northern and southern Europe diverged further. In Spain, the jobless rate rose to 26.2% from 25.8% the previous month, and in Italy it rose to 11.1% from 10.8%.

In contrast, unemployment in Germany held steady at 5.4% of the labour force, while in Austria it fell from 4.4% to just 4.3%.

"The real problem is that we have a two-speed Europe," economist Alberto Gallo of Royal Bank of Scotland told the BBC. "The biggest increase in unemployment is being driven by Italy and Spain.

"It is the same as you are seeing in financial markets," he explained. "The periphery [Spain and Italy] is the area where the banks are the least capitalised and need the most help, and the loan rates are the highest."

Spending hit

Data earlier this month showed that the eurozone had returned to a shallow recession in the three months to September, shrinking 0.1% during the quarter, following a 0.2% contraction the previous quarter.

The less competitive southern European economies, such as Spain and Italy - where governments have had to push through hefty spending cuts to get their borrowing under control, and crisis-struck banks have been cutting back their lending - have been in recession for over a year.

But the economies of Germany and France have also begun to weaken. Growth in the eurozone's two biggest economies came in at a disappointing 0.2%.

And more recent data suggests that both core eurozone economies have continued to skirt recession during the autumn.

Retail sales in Germany shrank 2.8% in October versus the previous month, down 0.8% from a year earlier, according to data released on Friday. Analysts had expected the country to record unchanged or moderately growing sales.

Meanwhile, separate data showed consumer spending in France shrank 0.2% in October versus the previous month, with spending on cars and other durable goods hardest hit.

Calmer markets

The sharp slowdown in the eurozone's consumer price index, to 2.2% in November, is also symptomatic of the weakness of spending.

However, the inflation data may also open the door to further measures by the ECB to boost the economy, as the index fell much closer to the central bank's 2% target rate.

"We have not yet emerged from the crisis," said Mr Draghi, speaking on pan-European radio. "The recovery of the eurozone will certainly begin in the second half of 2013.

"It's true that the budgetary consolidation entails a short-term contraction of economic activity, but this budgetary consolidation is inevitable."

Despite Mr Draghi's warning, and the generally poor state of the eurozone economy, markets have begun to take a far more sanguine view of the single currency's future.

Italy's implicit cost of borrowing in the financial markets has fallen to its lowest level in two years, dropping to an implied interest rate of about 4.5% for 10-year debt.

Spain is able to borrow from markets at a 10-year rate of about 5.5% - far below the 7%-8% rate being demanded over the summer.

Mr Draghi conceded that the announcement of the ECB's willingness to buy up potentially unlimited amounts of government debt had boosted market confidence, even though no eurozone government had actually taken up the ECB's offer yet.

Banking union

However, borrowing costs in southern Europe still remain elevated compared with France and especially Germany. Berlin is currently able to borrow for 10 years at 1.37%, close to an all-time low.

"For now, what the ECB has done is to stop the bleeding," said Mr Gallo at RBS. "The central bank needs to close the gap in loan borrowing costs between the periphery and the core."

However, Mr Gallo said in his view the only way to do this was for the eurozone to move ahead with its "banking union" - which includes putting all eurozone banks under a common regulator, and creating a pan-eurozone scheme for guaranteeing bank accounts.

He was echoing the view of Christine Lagarde, head of the International Monetary Fund, who on Friday said that creating a single deposit guarantee system should be Europe's top priority, more important than getting government budgets under control.

Fears over a possible government default or exit from the eurozone have made it much harder for Spanish and Italian banks to borrow, and put them at risk of a sudden exodus of depositors. This in turn has undermined the banks' role in supporting their respective national economies.

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