EUROPE WARNS OF HARDER ECONOMIC TIMES TO COME

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Associated Press

Posted on May 3, 2013 at 3:02 PM

c.2013 New York Times News Service

BRUSSELS — A deteriorating economy in the European Union is expected to drive unemployment to new highs this year in countries including Spain and Portugal that already are feeling acute pain, the Union’s top economics official warned Friday.

The new forecasts stood in stark contrast with U.S. figures Friday that showed that more new jobs were created in April than expected, which pushed the unemployment rate to a four-year low. While U.S. job creation is still slower than in a typical recovery, the new data could ease concerns of a sharp slowdown in the U.S. economy.

In Europe, far from delivering relief, the outlook presented by Olli Rehn, the Union’s commissioner for economic and monetary affairs, stoked further concerns that unemployment risked becoming endemic and could eventually cause social upheaval.

Unemployment is expected to reach 11.1 percent across the European Union this year and hit 12.2 percent in the eurozone. It is expected to remain at those levels for much of 2014, according to the Union’s spring forecast, which was released Friday. That picture is distinctly worse compared with 2012, when 10.5 percent were without jobs across the Union and 11.4 percent in the euro area.

Given the fragmented structure of the 27-nation Union, economists and analysts say there are few real policy options for easing the situation any time soon.

“We are living through a very difficult process of adjustment following the financial crisis” and that “is having a very unfortunate toll on employment,” Rehn said during a news conference.

“In view of the protracted recession,” he said, “we must do whatever it takes to overcome the unemployment crisis in Europe.”

Rehn offered to give some countries longer to meet their budget targets. He also urged a quicker pace of economic liberalization in countries like France and said it was necessary to get credit flowing to households and businesses, especially in southern Europe.

But analysts say remedies may be hard to find.

Unless the eurozone countries are willing to pool their debt and finances and engage in uniform economic policies — which is politically unlikely — the most effective medicine for the eurozone would be for Germany to stimulate its own economy to raise consumer demand for more of the goods sold by beleaguered nations in Southern Europe, said John Springford, a research fellow at the Center for European Reform, a research organization in London.

Another effective measure, he said, might be for Germany to drop its opposition to more direct lending by the European Central Bank to small and midsize companies in those countries.

“Relying less on exports, and more on domestic demand, would also be good for Germany as it’s starting to feel recessionary effects from the south,” Springford said. But, he acknowledged, “those steps would be very difficult politically for the government in Berlin to take.”

Nicolas Véron, a visiting fellow at the Peterson Institute for International Economics in Washington and a senior fellow at Bruegel, a research organization in Brussels, said he did not expect European banks to significantly regain confidence to start lending to small and midsize businesses until late 2014 at the earliest, when the ECB is expected to take over supervision of the European Union’s biggest lenders.

“Credit allocation in Europe is clearly dysfunctional,” Véron said, “and that’s hugely serious because lending in Europe is so reliant on banks compared to the United States, where there are far more diverse sources of capital, like bond markets and nonbank intermediaries.”

On Thursday, the ECB cut rates to a record low to do what it could to spur growth. Bond markets responded favorably, with Spanish 10-year yields falling below 4 percent Friday for the first time in a couple years, and Italian 2-year yields below 1 percent for the first time.

But those yields had already been on their way down after Mario Draghi, the ECB president, pledged last year to pull out all stops to save the euro. But the reduction in government borrowing costs has done little to ease joblessness in many countries.

Unemployment in Spain is expected to reach 27 percent this year, compared with 25 percent last year, the commission said, while the outlook for Portugal is 18.2 percent, after 15.9 percent last year. Unemployment in Greece, which has been in economic intensive care for three years, is expected to rise to 27 percent this year from 24.3 percent last year.

The figures also illustrate an increasingly rigid divide between the fortunes of these countries and those further north, where the picture is far rosier. In Germany, the forecast calls for unemployment to fall 0.1 percentage point this year from last, to 5.4 percent. In Austria, although unemployment is expected to rise 0.4 percentage point year, it would still be just 4.7 percent.

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The dismal outlook for many parts of the European Union prompted an outcry from critics of Rehn’s austere budget policies, which have come under attack from some economists who say his approach has crimped countries’ ability to restore growth.

“Again and again we are told that the recovery will come one day, if only the policy of harsh austerity is maintained,” said Hannes Swoboda, an Austrian member of the European Parliament who leads an alliance of Socialists and Democrats.

But Rehn “had to — once again — correct his forecasts by revising them downwards” and to admit that “no improvement in the labor market is to be expected this year,” Swoboda said.

Another ominous sign for Europe is that debt, as a percentage of gross domestic product, is expected to continue soaring in the eurozone’s weakest members.

By 2014, Greece is expected to be running debt amounting to 175 percent of GDP, while the comparable figure for Portugal was 124.3 percent and for Cyprus, 124 percent. All would be higher than the levels expected this year, even as those countries try to abide by the belt-tightening terms of international bailouts.

Rehn said that because Italian public debt was so high — it is expected to reach 132.2 percent next year — the country would need to stay the course on austerity even if he removed the country from the commission’s deficit watch list, known as the Excessive Deficit Procedure, later this month.

But Rehn was particularly critical of France, which will not reach the EU-mandated deficit target of 3 percent of gross domestic product this year or next.

Rehn described the growth forecasts of the government led by President François Hollande as “overly optimistic.” He also warned that France needed labor market overhauls and was suffering steadily declining competitiveness.

Rehn said France would be given until 2015 to meet its budget deficit targets, given its difficulties.

Rehn said Spain, the Netherlands, Slovenia and Poland would also be granted more time to meet their targets. But those extensions amounted to little more than an economic bandage, said Mujtaba Rahman, the director for Europe of the Eurasia Group.

“As long as countries continue to reform, they will earn more time to meet fiscal targets,” Rahman said. “But giving countries more time to meet targets is not the same as the EU having a credible strategy in place to boost growth.”

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