EU: Euro-zone jobless rate hits 2-year high

[November 28, 2008]  BRUSSELS, Belgium (AP) -- Unemployment in the 15 nations that share the euro shot up to 7.7 percent in October - the highest level in two years - as growth dropped sharply, the EU statistics agency Eurostat said Friday.

Prices also plunged with the annual inflation rate sinking to 2.1 percent in November from 3.2 percent in October, Eurostat said. Lower inflation gives the European Central Bank more room to reduce interest rates, which would help stoke growth.

The euro area officially went into a recession in spring and summer this year when growth shrank in the second and third quarters, as a financial crisis curbed global demand.

In real terms, this means job losses - lots of them and more to come.

Eurostat said some 225,000 more people were seeking work in October from the previous month. That means some 12 million people in the euro area were out of work last month. It also said unemployment in September was worse than it had first estimated, revising the rate upward to 7.6 percent from the 7.5 percent it reported last month.

Across all the EU's 27 states, some 17 million people were job-hunting in October, 290,000 more than a month earlier. The EU jobless rate was 7.1 percent in October, up from 7 percent in September.

The EU's executive Commission forecasts that the labor market will get even worse next year, with the euro-zone rate climbing to 8.4 percent in 2009 from a decade-low of 7 percent at the end of 2007. This will see an extra 2 million people out of work.

Unemployment is highest in Spain, at 12.8 percent. The bursting of a housing bubble has put builders out of work just as the tourism industry has been hurt by the global economic downturn.

The European Commission this week called on EU governments to pay out euro200 billion ($258 billion) in tax cuts, soft loans to industry and credit guarantees to encourage growth.

Tumbling exports have hurt Europe's manufacturing industry - particularly in Germany, the world's largest exporter - which had helped drive economic growth this year even as household spending froze.

But one of the most important tools to manage the economy is out of the hands of most European governments - the independent European Central Bank decides on borrowing costs for euro nations and until recently was slow to cut interest rates while inflation was high.

The price index is a calmer 2.1 percent this month, the lowest since September 2007. It is also close to the ECB's guideline of just under 2 percent. Oil prices have dropped by more than half since July while retailers are slashing prices in the key Christmas shopping season.

The bank's mandate is to tackle inflation, which it has repeatedly stressed was too high this year, but the lower figure released Friday will allow it to move more aggressively to slash rates and kickstart the economy.

In recent days, bank governors have spoken out in favor of lowering its key interest rate - now 3.25 percent - to tackle the slowing economy. They next meet to decide rates is on Dec. 4 in Brussels.

Marco Valli, an economist at Unicredit, said he expected the ECB to make a "shy cut" next week to bring the interest rate to 2.75 percent next week. Bank of America's Gilles Moec said he thought the bank might gun for a more dramatic cut to 2.5 percent.

Lower borrowing costs can tempt businesses and households to borrow more - as long as banks pass on the cuts to customers.

That isn't always the case in the current climate of tight credit. Banks are more fearful about taking on risks in the wake of the financial crisis and are finding it harder and more expensive to borrow money on credit markets that they lend on to customers.

In Britain, the government has pressured banks to pass on hefty interest rate cuts to hard-pressed homeowners and small businesses. Some banks prefer to freeze their rates to claw back profit and shore up their reserves.

[Associated Press; By AOIFE WHITE]

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