Unemployment and Bailouts in the Eurozone (Portfolio)

MIN READAug 2, 2012 | 13:46 GMT

Video Transcript

The European Union announced that unemployment in the eurozone reached 11.2 percent, a record since the common currency was introduced a decade ago. Meanwhile, youth unemployment rose to 22.4 percent. Unemployment data highlights the growing division between northern and southern eurozone countries. Austria still maintains the lowest unemployment rate in the eurozone, with only 4.5 percent of its population unemployed. Germany and the Netherlands also have rates of unemployment below the eurozone average.

On the contrary, Spain retained the European record with a quarter of its population unemployed, followed closely by Greece. In Portugal, unemployment 15.4 percent in June, the highest figure since the introduction of the euro. The outlook is negative for most members of the eurozone, as unemployment is expected to continue growing this year and economic activity will keep deteriorating in most of the eurozone area.

Unemployment in southern Europe usually gets some relief during the summer, given that tourism is a significant source of job creation in the periphery. This year, the outlook is not very promising for Greece, where political instability, social unrest and the constant fear of an increase in violence are negatively affecting the tourism sector. The number of foreign visitors to Spain and Portugal will likely remain stable, but domestic tourism in those countries will likely decline as economic conditions keep deteriorating.

The summer also gives European politicians the opportunity to meet and discuss the crisis without the immediate pressure from local parliaments. This week, EU leaders sought to find a solution to rising interest rates that Italy and Spain. Rome and Madrid basically have two proposals.

First, they want the European Central Bank to resume its program of buying government bonds on the secondary market. The bank has not been purchasing bonds for the past 20 weeks, as a way to put pressure over European politicians to apply economic reforms. Second, Rome and Madrid want Europe’s bailout mechanism to buy bonds in the primary market. They also want the European Stability Mechanism to be given a banking license, which means that it would be allowed to increase its size and therefore provide bigger bailouts.

This strategy has significant obstacles. The European bailout mechanisms are allowed to buy bonds from member states but only after countries sign a memorandum of understanding with the EU. Spain and Italy fear that the markets would perceive those kinds of agreements as a first step before a full sovereign bailout, which would in turn generate more uncertainty and bring yields up.

The ECB has said in the past that giving the ESM a banking license could violate the European Union’s treaties, which forbid the bank from lending money directly to national governments. The ESM can only become operational once the German constitutional court gives its approval, a decision that is expected by September.

Finally, not all eurozone countries support these ideas. Merkel was heavily criticized at home after the European summit where the future use of the European bailouts was discussed. The Bundesbank also opposes a greater intervention by the ECB, arguing that it would fuel inflation and damage the Bank's independence. Finland is still one of the firmest opponents to using the ECB as a lender of last resort.

The EU does have the necessary set of tools to keep yields down. These include the purchase of sovereign bonds in the secondary markets and the application of a new round of long-term refinancing operations.

But these alternatives only buy the EU some time, as they don’t solve the bloc’s main weaknesses. The European Union’s key issue of having under the same currency a group of 17 different economies that are growing further apart will not be solved through ECB actions.

Even if these measures bring some relief to the economic part of the crisis, they don’t put the EU closer to solving its political and structural shortcomings.

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