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Euro Zone Crisis

The euro zone crisis was triggered in 2009 when Greece's debts, left by its previous government, reached a record 300 billion euros, leaving the southern European economy with debt levels more than four times higher as a proportion of gross domestic product than the official euro zone cap of 60 per cent of GDP. Since the original problems were uncovered, Greece has been bailed out twice, and lenders have also had to rescue Ireland and Portugal. In the latter half of 2012. Cyprus also required a bailout.

BusinessEconomy

Euro zone joblessness at record high, inflation jumps

PUBLISHED : Tuesday, 02 July, 2013, 1:47am
UPDATED : Tuesday, 02 July, 2013, 1:47am

Euro zone unemployment is at a record high and consumer prices are being driven upward by volatile energy and food prices, data showed on Monday, underlining the fragility of the bloc’s economic health.

Inflation in the 17-nation euro zone, which is suffering from its longest ever recession, increased to 1.6 per cent year-on-year in June from 1.4 per cent in May, the EU’s statistics office Eurostat said.

Joblessness in the bloc stood at a record 12.1 per cent in May, with the number of people out of work rising further above 19 million, Eurostat added.

Government austerity programs across the continent have helped fuel the economic hardship and provoked widespread public discontent, especially with more than half of young people unemployed in Greece and Spain.

June’s inflation reading was the second upward move from a three-year low of 1.2 per cent in April, although it remains beneath the European Central Bank’s target of just under 2 per cent.

Economists expect inflation to remain below the target for the rest of this year, giving the ECB scope to leave interest rates at a record low, although signs of improvement at European factories may stop the bank from cutting rates again.

“June’s rise was driven rather by unfavourable base effects and the ECB has flagged the possibility of short-tern inflation volatility,” said Nick Matthews, a senior European economist at Nomura. “We expect inflation to drop sharply again in summer.”

June’s rise was driven rather by unfavourable base effects and the ECB has flagged the possibility of short-tern inflation volatility. We expect inflation to drop sharply again in summer

Prices of food, alcohol and tobacco products were the key factor driving inflation in June, followed by energy and services, Eurostat said in its first estimate for the month.

Core inflation, which strips out volatile food and energy prices, was stable at 1.2 per cent, and did not appear to sustain an upward trend, economists said.

The ECB said last week it will keep its accommodative monetary policy stance to help a gradual economic recovery that is expected to start in the second half of this year.

“The low inflation rate will permit the ECB to leave interest rates at very low levels for a long time,” said Christoph Weil, an economist at Commerzbank, who expects the bank to start increasing rates at the end of next year.

The euro zone’s economy has been stuck in a recession for the past year and a half, feeling the aftermath of its banking and debt crisis that has driven unemployment to record levels. Growth is likely to be minimal in the rest of this year.

Still, the bank is not expected to cut its main interest rate from a record low of 0.5 per cent when it meets on Thursday, preferring to keep pressure on European governments to push ahead with difficult economic reforms.

European Union leaders reiterated at a summit last week they would step up the fight against unemployment, which stood at 19.2 million in the euro zone in May, and agreed to launch a special scheme for young jobless Europeans.

But the 6-billion-euro (US$7.8-billion) plan over two years is unlikely to be enough to tackle youth unemployment that is near 60 per cent in Greece and Spain. Overall, close to six million people between the ages of 15 and 24 are without a job, prompting talk of a “lost generation” and concerns of unrest.

There are also wide differences in unemployment rates.

Germany saw its jobless rate fall to 5.3 per cent in May, the second lowest in the single currency area after Austria at 4.7 per cent. Italy and Spain saw a modest increase in joblessness, while unemployment in France was unchanged.

“The big story remains the huge divergence between unemployment rates across countries,” said Jonathan Loynes, chief European economist at Capital Economics.

“There is nothing to suggest that the euro zone economy does not need additional policy support, though the ECB looks unlikely to oblige this week,” he added.

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