As jobless rate soars, Europe rethinks austerity moves

Only a few months ago, aggressive austerity programs were being touted as the saviour of the debt-strapped euro zone. Now they're being blamed for the soaring unemployment rates that are helping to propel many of the euro-zone countries back into recession.

The jobless rate in the 17-country euro zone hit 10.4 per cent in December, the European Union's statistical agency, Eurostat, said Tuesday. That's the highest level since 1998, just before the launch of the common currency. About 16.5 million people are out of work in the euro zone, up more than 750,000 over one year. The region's Mediterranean frontier showed the biggest jobless increase.

The grim jobless numbers are forcing some European leaders, many economists and even the International Monetary Fund – co-sponsor of three sovereign bailouts and early advocate of austerity – to rethink the strategy of using spending cuts and tax hikes to try to crunch budget deficits when economic growth is soggy.

"The elevated unemployment rates in southern Europe are partly caused by structural factors, but also reflect the pain inflicted by the draconian austerity programs," said Martin van Vliet, senior economist at ING Bank. "In that regard, one should welcome any decision to relax unrealistic fiscal deficit targets, as being contemplated in the case of Spain."

In Madrid, the new centre-right government of Mariano Rajoy is pleading with the EU to inject some "realism" into Spain's tight budget deficit targets, which are being blamed for killing growth. Spain's economic output fell 0.3 per cent in the final quarter of 2011. Most forecasts point to a Spanish recession in 2012, when growth is needed desperately to create jobs.

Spain, with an unemployment rate of 22.9 per cent, had the highest jobless number in the 27-country EU, even higher than Greece (at 18.8 per cent). More worrisome is Spain's youth (under age 25) unemployment rate, at 49.6 per cent also the highest in the EU. Both figures have been rising relentlessly, leading to fears that the country could see the type of social unrest, even riots, that created mayhem in Athens several times last year.

Madrid's Puerto del Sol square was the scene of many anti-austerity protests last year. While they were largely peaceful, sporadic clashes with police in May and June resulted in hundreds of injuries and arrests. The protests were known as the 15-M movement, because they began on May 15.

Spain's high unemployment is the result of the collapse of Europe's biggest housing bubble in 2007 and 2008 and a dysfunctional labour market that adds disproportionately large numbers of jobs during boom years, but does the reverse during economic slumps.

The country has a dual labour market, "in which temporary workers have few rights and are easy to fire while incumbent workers are on permanent contract and the cost of dismissal is prohibitively high," said economists Samuel Bentolila, Juan Dolado and Juan Francisco Jimeno in a paper published Jan. 20 on the Vox.eu economists site.

Spain's unemployment rate was 8 per cent before its housing market collapsed.

The latest jobless numbers varied wildly across the EU and the euro zone, providing more evidence that a two-speed Europe is becoming entrenched. Generally speaking, the Mediterranean countries and the three bailed-out countries – Greece, Ireland, Portugal – had the worst jobless numbers, while the northern countries had the best.

Austria had the lowest unemployment rate, at 4 per cent, less than half the EU average. Germany's unemployment rate fell to 5.5 per cent from 5.6 per cent as the sagging euro boosted exports. France's unemployment rate rose 0.1 per cent to 9.9 per cent, while Italy's rose by the same amount to 8.9 per cent.

Youth unemployment rates are particularly worrisome. The EU's overall jobless rate for people under 25 is 22 per cent. No fewer than five countries – Spain, Greece, Slovakia, Portugal and Italy – have youth jobless rates at 30 per cent or higher. Some labour economists think the true figure is even greater.

As growth falters throughout the EU, the IMF is suddenly taking a softer stance on austerity programs. In a note published Sunday, Carlo Cottarelli, the IMF's director of fiscal affairs, acknowledged that the IMF might have jumped the gun in urging governments to step up their fiscal consolidation efforts. "In the current environment," Mr. Cottarelli said, "I worry that some might be going too fast."

Job creation, not austerity, was one of the main themes of Monday's EU leaders summit in Brussels. The European Commission's statement, released at the summit, said, "Governments are taking strong efforts to correct budgetary imbalances on a sustainable basis but further efforts are needed to promote jobs and growth."