Published November 30, 2012
BRUSSELS – Euro zone joblessness has reached a new high and the poor state of the economy is reducing inflation to near two-year lows, raising the prospect of further interest cuts by the European Central Bank.
As the euro zone sinks into its second recession since 2009, the number of people out of work in the euro zone rose by 173,000 people in October to almost 19 million people unemployed, the EU's statistics office Eurostat said on Friday.
That pushed joblessness to the highest level since the euro was introduced in 1999, at 11.7 percent of the working population, illustrating the human impact of a public debt and banking crisis that has reverberated across the world.
Struggling companies and indebted households have also lost the confidence to spend and invest, evident in the annual consumer price inflation reading for November, which dropped to 2.2 percent in November from 2.5 percent in October.
Consumer price inflation was at its lowest level since December 2010. One of the smallest rises in energy price inflation in a year helped to bring inflation to near the ECB's target of near, but just under 2 percent, opening the door to more rate cuts by the bank.
The ECB last cut its main refinancing rate in July, to a record low of 0.75 percent, and economists in a Reuters poll this week were more divided than ever on whether there will be another rate cut early next year.
"The outlook is still bleak," said Thomas Costerg, an economist at Standard Chartered in London, who sees an ECB rate cut in the first three months of next year.
"We think that ECB President Mario Draghi will leave the door open for more stimulus in the coming months," he said.
The cost of borrowing for banks and households in the euro zone is already at a record low of 0.75 percent and economists question whether further rate cuts will do much good, because of a lack of confidence among banks to lend.
The central bank may decide to postpone a rate cut until after its next meeting on Dec. 6 as it tries to keep markets focused on the benefits of its recently-announced plan to buy the bonds of governments in distress and keep their borrowing costs down.
The bond-buying programme has calmed nervy investors who predicted the break-up of the euro zone just a few months ago and many are moving back into Italian and Spanish bond markets.
But the euro zone's economic reality is one of a slowing German economy, stagnation in France, recession for Italy and Spain and an outright depression in Greece, with no signs of a quick recovery.
Many economists blame the spending cuts implemented by almost all governments in the past three years to try to bring down their deficits that ballooned over the past decade.
Portugal, for instance, shed more than one in 20 public sector jobs in the first nine months of 2012.
But in a shift in tone, the International Monetary Fund and the European Commission say now that they may have been too aggressive in pushing for government cutbacks. The Commission is now advocating "growth-friendly fiscal consolidation".
Draghi, speaking on French radio on Friday, tried to sound cautiously upbeat and has avoided the word "recession" in his public comments in recent weeks. "The recovery for most of the euro zone will certainly begin in the second half of 2013," he told Europe 1 radio.
Yet even the European Commission's forecast of 0.1 percent growth next year looks optimistic and many banks, from Citigroup to Standard Chartered, expect the recession to continue and unemployment to keep rising.
There are also wide divergences in unemployment in the euro zone, with the jobless rate at around 4 percent in Austria, 16 percent in Portugal and above 25 percent in Spain and Greece.
"The number of unemployed, which better captures the shorter-term dynamics, is showing little sign of abating," said J.P. Morgan economist Greg Fuzesi. "Even with our expectation of a modest recovery next year, the unemployment rate could reach 12 percent quite soon," he said.