European Central Bank

EU climbing out of crisis

Euro-area chiefs now need to tackle soaring unemployment at a time when Cyprus bailout talks are under way and Italy's polls are looming

PUBLISHED : Tuesday, 15 January, 2013, 12:00am
UPDATED : Tuesday, 15 January, 2013, 4:16am


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European leaders declaring they have gained the upper hand in the three-year-old debt crisis are sharpening efforts to channel a rebound in financial markets to an economic recovery to chip away at soaring unemployment.

Even as euro-zone chiefs call for more time to lock in a bailout package for Cyprus and elections loom next month in Italy, German Finance Minister Wolfgang Schaeuble said on Friday that the single currency was "over the worst of the crisis".

"Financial markets are starting to appear normal again," Erik Nielsen, chief global economist at UniCredit, wrote in a note to clients on Sunday. He referred to European Central Bank president Mario Draghi's comments last week forecasting the euro-area economy would climb out of recession this year.

Draghi's six-month-old pledge to do whatever it takes to deliver the 17-member currency out of the crisis has been credited for declining yields and an easing in market turmoil. That has given leaders more room to grapple with issues such as unemployment in Europe, which climbed to a record 11.8 per cent in November, with every other Spanish youth out of work.

Spain's 10-year bonds advanced for a second week, pushing yields to as low as 4.84 per cent on Friday, down from the July peak of 7.62 per cent that fed worries about a bailout and a fragmentation in the euro. The euro climbed 3.1 per cent last week to US$1.3343, the highest level since March last year.

Draghi cited "positive contagion" in European markets after the ECB's governing council left the central bank's benchmark interest rate at 0.75 per cent, holding its fire amid signs that the debt crisis is waning. Monetary-policy makers have opted to rely on an unconventional policy arsenal such as the ECB's pledge to buy unlimited amounts of sovereign debt.

Draghi told reporters in Frankfurt last week that "a gradual recovery should start" in late 2013, during which Standard & Poor's has said Ireland and Portugal could return to the markets after their bailout programmes expire.

Luxembourg Prime Minister Jean-Claude Juncker, who leads euro finance ministers, also signalled the improved mood, saying "the worst is probably over, but what we still have to do is difficult".

Those challenges include a persistently high jobless level that is a testament to the depth of the debt crisis. In addition to soaring unemployment in Spain and other bailout countries, French President Francois Hollande is struggling to reverse a 19-month rise in jobless claims and jump-start an economy that has barely grown in more than a year.

On Saturday, Hollande backed an agreement between French business leaders and three out of five unions giving employers more flexibility to reduce working time and salaries.

"We often have dual labour markets with very little protection for the young and protection for the old," Draghi said last week. The ECB in December predicted the euro economy would shrink 0.3 per cent this year.

Joachim Fels, chief economist at Morgan Stanley in London, warned that market improvement was inducing complacency among European policy makers as it had in the past, slowing efforts to overhaul the euro-area institutions. "Now we're in the complacency phase," Fels said. "I worry that you always need a renewed crisis to push both government and the ECB to take the next step."

Potential stumbling blocks over the coming weeks include a bailout for Cyprus that could approach the size of the island nation's €18 billion (HK$186.15 billion) economy and an Italian election that could upend that country's crisis response.

Chancellor Dr Angela Merkel, who met European counterparts in Cyprus last Friday, said negotiators for a Cypriot programme were "far from the stage at which we can make a decision". She threw her support behind Nicos Anastasiades, leader of Cyprus' DISY opposition, who is poised to take over the presidency after next month's elections.

Resistance is building to a Cyprus package that euro finance ministers wanted to wrap up this month. Merkel's coalition allies were among politicians saying a bank rescue in the country could abet tax fraud.

Cyprus was "more than ready" to sign an agreement with creditors, Finance Minister Vassos Shiarly was cited by the Cyprus News Agency as saying.

In Italy, in the throes of its fourth recession since 2001, elections are scheduled for February 24-25 after Prime Minister Mario Monti announced his resignation last month following former premier Silvio Berlusconi's withdrawal of support. Front runner Pier Luigi Bersani would probably turn to Monti for support should he fail to win a Senate majority, Bersani's economic-policy spokesman said.