Euro Jobless Fault Line Festers as Italy Scars RecoveryStefan Riecher, Lorenzo Totaro and Kristian Siedenburg
Euro-area jobless numbers this week may lay bare a fault line scarring the region’s recovery as evidence of Germany’s employment muscle contrasts with the political quagmire destroying work in Italy.
While the currency bloc’s longest-ever recession has ended, unemployment held at 12 percent in September, according to the median of 36 forecasts in a Bloomberg survey of economists. Within that data lies a rift between two of its largest economies, with Italy’s rate seen by economists to have reached 12.3 percent, the highest since records began in 1977 -- and more than double Germany’s comparable level.
Italy will “critically determine the fate of the euro area” and the region won’t prosper if that country can’t restore economic growth, European Central Bank Executive Board member Joerg Asmussen said last week. Italian officials predict joblessness in the euro zone’s third-biggest economy will keep rising, against a backdrop of a fragmented coalition jeopardized by the legal woes of former premier Silvio Berlusconi.
“We are still in a very discouraging situation for most of the euro area,” said Anatoli Annenkov, an economist at Societe Generale SA in London. “That’s particularly true for Italy, where politics has come to a rest and necessary structural reforms are not kicking in at all.”
The extra yield investors demand to hold Italy’s 10-year debt instead of similar-maturity German bunds stood at 245 basis points at 5:12 p.m. in Frankfurt today, little changed from 247 basis points on Oct. 25. That compares to a 2013 high of 361 basis points on March 28. The euro traded near a two-year high against the dollar before the Federal Reserve begins a two-day meeting tomorrow.
The European Union’s statistics office in Luxembourg will publish euro-area labor data at 11 a.m. on Oct. 31. That’s the day after Germany’s Federal Labor Agency releases numbers for Europe’s biggest economy, predicted by all but two of 36 economists to show a 6.9 percent jobless rate, the same as in August. The level comparable with other euro countries was 5.2 percent, the second-lowest after Austria.
Italy’s statistics office Istat will release labor numbers for September an hour before the euro area report. Last month, data showed the jobless rate among people aged between 15 and 24 reached an historic high of 40.1 percent.
“Youth unemployment is the true nightmare of our country,” Italian Prime Minister Enrico Letta said on Oct. 21 in Rome. In Washington three days previously, he warned of the risk of a “lost generation.”
Such blight afflicts economies throughout southern Europe, from Greece to Spain. But Italy was the country Asmussen singled out in a speech in Milan on Oct. 25, as he called on its political class to confront the need for structural reforms.
“The future of the euro area will not be decided in Paris or Berlin, or in Frankfurt or Brussels -- it will be decided in Rome,” he said. “The euro area cannot prosper if its third-largest economy has a potential growth rate of zero.”
Asmussen spoke an hour after Fitch Ratings affirmed Italy’s BBB+ rating with a negative outlook, saying that the cumulative damage from the recession there that started in 2011 may exceed 4 percent of output. While the company predicts that slump to cease this year, it said that gross domestic product is now down 8 percent from its high point in 2007.
“We have to break open our labor markets,” Euro group head Jeroen Dijsselbloem said in a speech in Madrid today. “A further reform of the labor markets is crucial.”
Italian unemployment will probably average 12.4 percent in 2014, up from 12.1 percent this year, according to Bloomberg’s monthly survey of economists published Oct. 10. Joblessness will decline in Germany and Spain next year and hold at 12.1 percent in the euro area, the survey shows.
Leaders of Italian unions expressed worries this month that foreign investors might eliminate jobs as Spain’s Telefonica SA tightened its grip on Telecom Italia SpA and Alitalia SpA’s crisis deepened, potentially souring Air France-KLM Group’s appetite to increase its stake in the carrier.
Electrolux AB, the world’s second-biggest home appliances maker, said on Oct. 25 that it will start examining the competitiveness of its Italian manufacturing setup for major appliances at four plants employing about 3,500 people.
Some economists say that ultimately, the Italian job market will benefit from an economic recovery in the euro area, the country’s biggest export market.
“Improvement in demand forecasts will likely be the key determinant of job creation in the coming quarters,” said Guillaume Menuet, an economist at Citigroup Inc. in London. “Italy and Spain are our top picks from the periphery, assuming that the recovery continues.”
Italian business confidence unexpectedly increased in October, climbing to the highest since August 2011. The gauge rose to 97.3 this from a revised 96.8 in September, Istat said today. That compares with a median estimate of 96, according to a Bloomberg survey of 15 economists.
“Letta’s government has given new impulse to the reform process,” Italian Finance Minister Fabrizio Saccomanni said in a letter to the Financial Times today, citing a number of measures including changes in the political system, a simplification of the tax regime and steps to attract foreign direct investment.
European new car sales rose the most in more than two years in September and euro-area consumer confidence rose for an 11th month in October. Spain emerged from a two-year recession in the third quarter, strengthening Prime Minister Mariano Rajoy’s efforts to repair the nation’s finances and leave the four-year old sovereign debt crisis behind.
Gross domestic product in the 17-nation bloc grew 0.3 percent in the three months through June after six quarterly contractions, and European Central Bank President Mario Draghi expects a further recovery toward the end of the year.
“Confidence indicators up to September confirm the expected gradual improvement in economic activity from low levels,” he said on Oct. 2. Even so “the risks surrounding the economic outlook for the euro area continue to be on the downside,” he said.
A recovery in Europe’s labor market will be “modest and uneven,” Citigroup’s Menuet said. There’s a “significant likelihood of high unemployment becoming a permanent feature of the euro area.”
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