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Eurozone unemployment hits record levels

  • Hollande greets Monti before a working lunch at the Elysee Palace in Paris.

  • EUROZONE UNEMPLOYMENT

ROME/FRANKFURT: Joblessness in the eurozone hit Tuesday its highest level since the single currency was born, a further sign of economic desperation as hopes erode that the bloc will be saved by its central bank this week.

An additional 123,000 people were out of work in the eurozone in June, figures from Eurostat showed, bringing the unemployment rate to a record high 11.2 percent across the 17 countries that use the single currency.

The rate hides wide divergences, with unemployment as low as 4.5 percent in Austria and as high as 24.8 percent in Spain, where a shrinking economy makes it ever more difficult to pay off debt.

New data showed capital fleeing Spanish banks at a growing rate. Spain has come very close to losing affordable access to financial markets, raising the prospect of a bailout that would swamp the eurozone’s hastily erected defenses. If Spain goes, Italy, with an economy twice the size, could follow.

Eurozone leaders have spent the past week issuing statements promising to take whatever steps are necessary to rescue the currency, but none have raised expectations as much as Mario Draghi, head of the European Central Bank.

His announcement last Thursday that the ECB would do whatever within its mandate to rescue the currency raised expectations that he will deliver forceful new steps this week to lower Spanish and Italian borrowing costs.

But market sentiment has since soured, showing that investors doubt whether he can deliver.

Germany, which says it is illegal for the ECB to bankroll government borrowing, squelched talk of any easing of its opposition to letting the eurozone’s rescue fund borrow from the ECB so it could buy almost unlimited quantities of government bonds.

Italian Prime Minister Mario Monti, who has campaigned for concerted action by the eurozone’s rescue funds and the ECB to bring down ruinous borrowing costs for Spain and Italy, struck an optimistic tone.

“It is a tunnel but ... some light is appearing at the end of the tunnel. We and the rest of Europe are approaching the end of the tunnel,” he told RAI public radio before talks in Paris with French President Francois Hollande.

Monti said decisions taken at an EU summit last month were starting to bear fruit.

“We are now seeing the results both in the willingness of European institutions as well as from the governments of individual countries, including Germany,” he said.

After lunching with Hollande, he said there was no time to lose and they had discussed deadlines. “We cannot afford even a minute of distraction.”

The ECB’s Draghi promise last week to act to preserve the euro raised investors’ expectations of a resumption of a long-suspended government bond-buying program. Investors are waiting to see what the ECB announces at a meeting of its policy-setting Governing Council Thursday.

“Today will probably be a quiet last day of the month. Everybody is waiting for Thursday to see if Draghi can deliver,” said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.

“He’d better pull a big rabbit out of his hat.”

However, Central Bank sources cautioned against expecting dramatic action, saying bold moves could be at least five weeks away because other elements must first fall into place.

They said that Spain would first have to formally request a eurozone assistance program, which it has so far resisted doing, and eurozone governments would have to agree to use their rescue funds to buy bonds in tandem with the ECB.

Safe-haven German government bonds rallied Tuesday and European shares fell as skepticism over the prospect of bold ECB action set in and Berlin repeated its opposition to a banking license for the rescue fund.

Monti, who will also visit Finland and Spain, said that he was confident Spanish Prime Minister Mariano Rajoy would be able to tackle the country’s problems.

The scale of Rajoy’s challenge was highlighted Tuesday when figures showed that capital flight from Spain accelerated in May, the month when Madrid was forced to nationalize the fourth biggest lender, Bankia, and before eurozone countries agreed to help bail out Spanish banks.

Capital outflows in the first five months of this year totaled 163.2 billion euros – equivalent to about 16 percent of economic output. The same period last year saw a net inflow of 14.6 billion euros.

Spanish retail sales fell by 5.2 percent year-on-year on a calendar-adjusted basis in June, separate data showed, marking a 24th straight month of declines.

Near-bankrupt Greece meanwhile reported that it is fast running out of cash as it awaits the next installment of aid from international lenders.

Deputy Finance Minister Christos Staikouras said that in the absence of 3.2 billion euros needed to repay an ECB bond on Aug. 20, Athens would lack the money to pay everyday public expenses ranging from police and other public service wages to pensions and welfare benefits.

“Cash reserves are almost zero,” he told state NET television. “It is risky to say until when [they will last] ... but we are certainly on the brink.”

Speaking to reporters in London Monday evening, Hollande voiced support for Monti’s campaign to persuade eurozone leaders and institutions to act to reduce Italian and Spanish borrowing costs.

“European solidarity is of course about laying down discipline, but it’s also about allowing countries that made hard choices to be rewarded with lower interest rates,” Hollande said during a visit to the Olympic Games.

“If countries undertake austerity measures and still have very high interest rates, how can they win the trust of their people?” he said.

Monti spoke by telephone over the weekend with German Chancellor Angela Merkel, who is holidaying in northern Italy.

Berlin agreed in principle at an EU summit in June that the eurozone rescue funds could buy bonds of countries that risk losing market access, but was angered when Monti said such support should not entail any stricter economic conditions or international monitoring.

There has also been renewed pressure from France, Italy and some central bankers to give the eurozone’s future permanent rescue fund a banking license so it can borrow money from the Central Bank to fight bond market contagion.

The Sueddeutsche Zeitung said supporters of the idea were gaining ground in the eurozone, but the German Finance Ministry reiterated its opposition Tuesday, sending markets down.

A legal opinion commissioned by the ECB in March 2011 concluded that such a move would breach an EU treaty ban on monetary financing of governments.

 
A version of this article appeared in the print edition of The Daily Star on August 01, 2012, on page 6.
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