Unemployment up as recession fears grow

Unemployment in the euro area rose again to its highest in the lifetime of the single currency in October, providing yet another ominous sign that the region could soon fall back into recession – as experts called on the European Central Bank to cut interest rates again next week to spark life into the economy. And the debt crisis showed no signs of abating as finance ministers admitted they would not raise the hoped-for €1tn to boost the eurozone bail-out facility and said they would turn to the International Monetary Fund to help leverage the fund.

Eurozone unemployment increased in October to a 13-year high of 10.3 per cent, up from 10.2 per cent in September, and the number of people out of work rose by 126,000. The highest jobless rate was in Spain where 22.8 per cent of people, and almost half of under-25s, were unemployed. Separately, Eurostat estimated that inflation in the eurozone would remain at 3 per cent in November, showing no change on the previous month.

Howard Archer, chief European and UK economist at IHS Global Insight, said it was "evident that deteriorating economic activity and weakened business confidence is taking an increasing toll in eurozone labour markets". He added that the inflation figure was "disappointing" and probably kept up by high year-on-year increases in energy and food prices – but should fall to below 2 per cent by the middle of next year. "There is a very strong case for the ECB to cut interest rates again at its December 8 policy meeting, having trimmed them from 1.5 per cent to 1.25 per cent in November. There can be little doubt that eurozone inflation will retreat markedly over the coming months while the dire October unemployment data heighten the recession fears," Archer said.

The news was described as a "nasty combination" by Jennifer McKeown, senior European economist at Capital Economics. "High unemployment and inflation together are clearly putting strong downward pressure on spending power, particularly when taken together with fiscal austerity. However, inflation looks set to fall sharply before long. While energy inflation is likely to have remained elevated at about 12 per cent in November, we see this component knocking about 1 per cent off the headline rate in the next six months," she said. "We see the ECB cutting interest rates next week and perhaps hinting at further unconventional measures to come."

The Centre for Economics and Business Research's Shehan Mohamed said he also expected the ECB to act. "The rate of unemployment increased in six eurozone countries over the month for which the latest October figures are available. Unemployment rates in Spain, Portugal, Cyprus, Italy, Netherlands and Austria are all on an upward trend. The German labour market is clearly bucking the trend, with unemployment at 6.9 per cent. However, Germany's main export market is the eurozone, and turmoil in the single currency area is expected to impact jobs and growth in the near future as the eurozone debt crisis continues to be a concern."

At a meeting in Brussels yesterday eurozone finance ministers agreed to make the European Financial Stability Facility more flexible in an effort to protect the likes of Italy and Spain from the debt crisis – but conceded that the rescue fund would fall short of the €1tn that was planned. They said they were seeking a role for the IMF in managing bilateral loans to boost its firepower, though there were few specifics on how this might work or on a possible role for the ECB as a broker. European Union economic affairs commissioner Olli Rehn said the details were "something that needs to be discussed with the IMF and we are consulting member states".

Meanwhile options to leverage the expanded EFSF include using it to guarantee up to 30 per cent of new bond sales by struggling eurozone countries, and creating so-called co-investment funds to encourage public and private sector participation. Jean-Claude Juncker, president of the Eurogroup, said: "We haven't lowered our ambitions but the conditions have changed, so it will probably not be €1 trillion but less." Klaus Regling, the EFSF's chief executive, said the leveraged fund should be ready by January.

Responding to the announcement, Sony Kapoor, managing director of the economic think-tank Re-Define, said it was good that the "pretence" of being able to provide €1tn of support through the EFSF had been dropped. "The fact remains that while the EFSF has sufficient resources to support Greece, Ireland and Portugal, it is simply not up to the task of restoring confidence in Italy and Spain unless the ECB provides direct or indirect support."

He said there had been little progress in discussions about increasing IMF resources since the G20 meeting in Cannes and it was "quite clear that the ground is being prepared in the EU for the ECB to 'independently' take a decision to increase its support for the troubled euro area sovereigns. The decision of EU politicians to stop publicly exhorting the ECB to do more is probably the first step towards the ECB doing more. While it is not clear what form enhanced ECB support would take or indeed when it would be provided, that fateful day is not far."

Finance ministers also signed-off the latest €8bn tranche of Greece's €110bn bail-out after Greek leaders sent letters to Brussels setting out their commitment to the EU and IMF-backed programme austerity and reforms. And Ireland was praised for its implementation of its bail-out terms and the next installment of its loans approved. Kapoor said the decision on Greece was "a very tiny step towards the long march out of the crisis" and a failure to agree would have had "substantial nuisance value". But he added: "The Greek discussion has now become a sideshow in the euro crisis with the much bigger problems of Italy and Spain having taken centre stage."

Today, the ECB did take action to increase liquidity in conjunction with the United States Federal Reserve and the central banks of England, Japan, Canada and Switzerland. They said in a joint statement that, from December 5, the price at which banks outside the US borrow dollars from central banks – swapped for their own currency with the Federal Reserve – would be cut by 50 basis points. The scheme, originally intended to end in August next year, was also lengthened to February 2013. Stock markets responded positively to the news, with the main indices across Europe up by between 2.5 and 4 per cent shortly after the announcement.