FRANKFURT — The euro zone reached another milestone in its stumbling recovery Friday when the official unemployment rate fell for the first time since 2011.
But a separate report showing a slight rise in inflation was not enough to quell fears that the euro zone was at risk of being sucked into a ruinous downward price spiral.
And a downgrade of the Netherlands’ public debt by the rating agency Standard & Poor′s underlined what may be the euro zone's biggest long-term problem: Even the strongest countries are suffering from weak growth and years of austerity.
The downgrade was not a big surprise. But it meant that only three countries in the euro zone have S.& P.′s highest AAA rating, Germany, Austria and Finland.
Unemployment in the 17 countries of the euro zone dropped to 12.1 percent in October from 12.2 percent the previous month, according to official figures.
While that was certainly decent news for the 61,000 fewer people who are jobless, unemployment remains near a record high.
At the same time, inflation in the euro zone rose to 0.9 percent in November from a year earlier, up from 0.7 percent in October, according to Eurostat, the European Union’s statistics office.
The inflation rate is still well below the European Central Bank’s target rate of below but close to 2 percent, and short of the level required to convince many economists that the euro zone is safe from deflation, a persistent and broad decline of prices that is a typical feature of economic depression.
“The threat of deflation has not been removed by this single month,” said Zsolt Darvas, a senior fellow at Bruegel, a research organization in Brussels. “Over all, I continue to be somewhat skeptical about recovery in the euro zone.The major problems are still there.”
Even if the Eurostat data Friday was mildly encouraging, neither the unemployment data nor the inflation numbers did much to settle the debate among economists about whether the euro zone was slowly on the mend or stuck in stagnation, under the constant threat of renewed recession or worse.
As Mr. Darvas pointed out, the euro zone banking system is not functioning properly, credit remains tight, business investment is weak and government austerity still prevails.
Much of the dip in unemployment came from France, as companies hired more young people on temporary contracts. Joblessness also fell in Portugal and Ireland, but remained high in Spain, where the rate rose to 26.7 percent from 26.6 percent.
The lowest rates were in Austria, with 4.8 percent, and Germany, with 5.2 percent. In Greece, which is several months behind in its reporting, the rate for August was 27.3 percent. There has been speculation that the European Central Bank could take further action to stimulate lending on Thursday when it holds its monthly meeting on monetary policy.
The E.C.B. could perhaps emulating the Bank of England by offering cheap loans to banks on the condition that they lend the money on to businesses and individuals. Most analysts do not expect a further decrease in interest rates so soon after the central bank cut its benchmark interest rate this month to 0.25, a record low.
But members of the central bank′s Governing Council still may be concerned that inflation remains too far from the 2 percent target. Low inflation was the result of falling energy prices, Eurostat said, while the cost of food rose 1.5 percent and services 1.6 percent.
Prices of industrial goods rose just 0.3 percent. Some economists, noting a pickup in prices for services, saw the rise in inflation as a sign that deflation fears were overblown.
“The data confirm our assessment that the fall of the inflation rate in October was an outlier and the euro zone is not heading for deflation,” Christoph Weil, an economist at Commerzbank, said in a note.
One idea is that the low inflation is merely a sign that wages are falling in countries like Greece and Spain, a painful but ultimately necessary adjustment that would allow those countries to regain lost competitiveness.
But others warn that deflation, once it starts, could plunge Europe back into crisis and revive doubts about the survival of the euro zone.
Deflation is considered even worse than runaway inflation, because people delay purchases in anticipation of ever lower prices, undercutting corporate profits and causing companies to stop investing in new plants and equipment.
The result is rising unemployment and further downward pressure on prices.“The overall assessment remains that inflation is very low,” Marie Diron, an economist who advises the consulting firm Ernst & Young, said in an email.
“We think that the E.C.B. needs to recognize the risk of deflation more clearly and act pre-emptively.” Economists at the advisory firm Oxford Economics calculate that if the euro zone suffered deflation, unemployment would rise to 16.5 percent by 2018, or 25 million people, as opposed to 19.3 million in the region in October.
At the same time, countries like Greece would have even more trouble paying back debts, because economic output would shrink and tax receipts would dwindle.
“While there has been a lot of talk about deflation, we think that the implications of such a scenario have not been fully grasped,” Oxford Economics said in a report issued Friday. “Without decisive policy action, a euro zone breakup would be hard to avoid in this scenario.”
In a reminder that the euro zone’s problems are not confined to Southern Europe, S.& P.′s downgrade of the Netherland’s government debt late Thursday noted that its economy was struggling more than those of its peers. It calculated that the Dutch economy would contract this year and barely grow next year.
“The downgrade reflects our opinion that the Netherlands’ growth prospects are now weaker than we had previously anticipated,” S.& P. said as it reduced the country from AAA to AA+, which is still better than France and well above countries like Spain or Ireland.
Market rates on 10-year Netherlands government bonds fell slightly to just above 2 percent, a sign that investors were hardly alarmed by the rating agency’s action. In addition, S.& P. raised its rating on Cyprus and said the outlook for Spain′s rating was stable instead of negative as before.
But the downgrade of the Netherlands underlined what may be Europe’s most serious long-term problem. Even its strongest countries, including Germany, are growing very slowly by international standards, burdened by high taxes and social welfare costs and highly regulated job markets.
Unemployment in the Netherlands, which is in a recession, was 7 percent in October, according to figures released Friday, unchanged from September. But the jobless rate was up from 5.5 percent a year earlier.
The downgrade “throws the depth and breadth of the four-year-old euro zone crisis into sharper relief,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note to clients.
“It’s also a reminder, if one were needed, of the extent to which the creditworthiness and economic performance of the core of Europe’s single currency area has been undermined over the past two years.”
The unemployment figures Friday showed that the rate in the 28 countries in the European Union, including countries not in the euro zone like Britain, Poland or Romania, was unchanged at 10.9 percent.
nytimes.com
But a separate report showing a slight rise in inflation was not enough to quell fears that the euro zone was at risk of being sucked into a ruinous downward price spiral.
And a downgrade of the Netherlands’ public debt by the rating agency Standard & Poor′s underlined what may be the euro zone's biggest long-term problem: Even the strongest countries are suffering from weak growth and years of austerity.
The downgrade was not a big surprise. But it meant that only three countries in the euro zone have S.& P.′s highest AAA rating, Germany, Austria and Finland.
Unemployment in the 17 countries of the euro zone dropped to 12.1 percent in October from 12.2 percent the previous month, according to official figures.
While that was certainly decent news for the 61,000 fewer people who are jobless, unemployment remains near a record high.
At the same time, inflation in the euro zone rose to 0.9 percent in November from a year earlier, up from 0.7 percent in October, according to Eurostat, the European Union’s statistics office.
The inflation rate is still well below the European Central Bank’s target rate of below but close to 2 percent, and short of the level required to convince many economists that the euro zone is safe from deflation, a persistent and broad decline of prices that is a typical feature of economic depression.
“The threat of deflation has not been removed by this single month,” said Zsolt Darvas, a senior fellow at Bruegel, a research organization in Brussels. “Over all, I continue to be somewhat skeptical about recovery in the euro zone.The major problems are still there.”
Even if the Eurostat data Friday was mildly encouraging, neither the unemployment data nor the inflation numbers did much to settle the debate among economists about whether the euro zone was slowly on the mend or stuck in stagnation, under the constant threat of renewed recession or worse.
As Mr. Darvas pointed out, the euro zone banking system is not functioning properly, credit remains tight, business investment is weak and government austerity still prevails.
Much of the dip in unemployment came from France, as companies hired more young people on temporary contracts. Joblessness also fell in Portugal and Ireland, but remained high in Spain, where the rate rose to 26.7 percent from 26.6 percent.
The lowest rates were in Austria, with 4.8 percent, and Germany, with 5.2 percent. In Greece, which is several months behind in its reporting, the rate for August was 27.3 percent. There has been speculation that the European Central Bank could take further action to stimulate lending on Thursday when it holds its monthly meeting on monetary policy.
The E.C.B. could perhaps emulating the Bank of England by offering cheap loans to banks on the condition that they lend the money on to businesses and individuals. Most analysts do not expect a further decrease in interest rates so soon after the central bank cut its benchmark interest rate this month to 0.25, a record low.
But members of the central bank′s Governing Council still may be concerned that inflation remains too far from the 2 percent target. Low inflation was the result of falling energy prices, Eurostat said, while the cost of food rose 1.5 percent and services 1.6 percent.
Prices of industrial goods rose just 0.3 percent. Some economists, noting a pickup in prices for services, saw the rise in inflation as a sign that deflation fears were overblown.
“The data confirm our assessment that the fall of the inflation rate in October was an outlier and the euro zone is not heading for deflation,” Christoph Weil, an economist at Commerzbank, said in a note.
One idea is that the low inflation is merely a sign that wages are falling in countries like Greece and Spain, a painful but ultimately necessary adjustment that would allow those countries to regain lost competitiveness.
But others warn that deflation, once it starts, could plunge Europe back into crisis and revive doubts about the survival of the euro zone.
Deflation is considered even worse than runaway inflation, because people delay purchases in anticipation of ever lower prices, undercutting corporate profits and causing companies to stop investing in new plants and equipment.
The result is rising unemployment and further downward pressure on prices.“The overall assessment remains that inflation is very low,” Marie Diron, an economist who advises the consulting firm Ernst & Young, said in an email.
“We think that the E.C.B. needs to recognize the risk of deflation more clearly and act pre-emptively.” Economists at the advisory firm Oxford Economics calculate that if the euro zone suffered deflation, unemployment would rise to 16.5 percent by 2018, or 25 million people, as opposed to 19.3 million in the region in October.
At the same time, countries like Greece would have even more trouble paying back debts, because economic output would shrink and tax receipts would dwindle.
“While there has been a lot of talk about deflation, we think that the implications of such a scenario have not been fully grasped,” Oxford Economics said in a report issued Friday. “Without decisive policy action, a euro zone breakup would be hard to avoid in this scenario.”
In a reminder that the euro zone’s problems are not confined to Southern Europe, S.& P.′s downgrade of the Netherland’s government debt late Thursday noted that its economy was struggling more than those of its peers. It calculated that the Dutch economy would contract this year and barely grow next year.
“The downgrade reflects our opinion that the Netherlands’ growth prospects are now weaker than we had previously anticipated,” S.& P. said as it reduced the country from AAA to AA+, which is still better than France and well above countries like Spain or Ireland.
Market rates on 10-year Netherlands government bonds fell slightly to just above 2 percent, a sign that investors were hardly alarmed by the rating agency’s action. In addition, S.& P. raised its rating on Cyprus and said the outlook for Spain′s rating was stable instead of negative as before.
But the downgrade of the Netherlands underlined what may be Europe’s most serious long-term problem. Even its strongest countries, including Germany, are growing very slowly by international standards, burdened by high taxes and social welfare costs and highly regulated job markets.
Unemployment in the Netherlands, which is in a recession, was 7 percent in October, according to figures released Friday, unchanged from September. But the jobless rate was up from 5.5 percent a year earlier.
The downgrade “throws the depth and breadth of the four-year-old euro zone crisis into sharper relief,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note to clients.
“It’s also a reminder, if one were needed, of the extent to which the creditworthiness and economic performance of the core of Europe’s single currency area has been undermined over the past two years.”
The unemployment figures Friday showed that the rate in the 28 countries in the European Union, including countries not in the euro zone like Britain, Poland or Romania, was unchanged at 10.9 percent.
nytimes.com
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