Record Unemployment, Low Inflation Underline Europe's Pain

Unemployment has reached a new high in the euro zone and inflation remains well below the European Central Bank's target, underscoring just how severe a challenge EU leaders face to revive the bloc's sickly economy.


* Unemployment at 12.2 pct in April; inflation at 1.4 pct in May

* Joblessness in Italy at highest in nearly four decades

* EU leaders' meeting in June to address youth unemployment

* Economists don't see ECB action at June meeting, poll shows

Unemployment has reached a new high in the euro zone and inflation remains well below the European Central Bank's target, underscoring just how severe a challenge EU leaders face to revive the bloc's sickly economy.

Joblessness in the 17-nation currency area rose to 12.2 percent in April, statistics agency Eurostat said on Friday, marking a new record since the data series began in 1995.

With the euro zone also in its longest recession since its creation in 1999, consumer price inflation was far below the ECB's target of just below 2 percent, coming in at 1.4 percent in May, slightly above April's 1.2 percent rate.

That rise may quieten concerns about deflation, but the deepening unemployment crisis is a threat to the social fabric of the euro zone, with almost two-thirds of young Greeks unable to find work exemplifying southern Europe's threat of creating a 'lost generation'.

Economists and policy makers have expressed concern that the greatest threat to the unity of the euro zone is now social breakdown from the crisis, rather than market-driven factors.

In France, Europe's second largest economy, the number of jobless rose to a record in April, while in Italy, the unemployment rate hit its highest level in at least 36 years, with 40 percent of young people out of work.

Some economists expect the ECB, which meets on June 6, to act to revive the economy and go beyond another interest rate cut to consider a U.S.-style money printing programme known as quantitative easing.

"We do not expect a strong recovery in the euro zone," said Nick Matthews, a senior economist at Nomura International in London. "It puts pressure on the ECB to deliver even more conventional and non conventional measures."

In the past, the euro zone has needed economic growth of around 1.5 percent to create new jobs, according to Carsten Brzeski, an economist at ING. With the Organisation for Economic Cooperation and Development forecasting this week that the euro zone economy would contract by 0.6 percent this year, unemployment is set to worsen long before it turns around.

"We do not see a stabilisation in unemployment before the middle of next year," said Frederik Ducrozet, an economist at Economist at Credit Agricole in Paris. "The picture in France is still deteriorating."


ECB President Mario Draghi, whose bold decision-making helped protect the euro zone from break-up last year with a plan to buy the bonds of governments in trouble, has so far preferred to leave the onus on euro zone governments to reform.

A majority of economists polled by Reuters do not expect the ECB to cut its deposit or main refinancing rates in the coming months, although the OECD this week called for the bank to consider quantitative easing.

The Commission, the EU's executive, told governments this week they must focus on reforms to outdated labour and pension systems to regain Europe's lost business dynamism, a move to shift focus away from debilitating budget cuts towards growth.

EU leaders meeting at the end of June in Brussels are expected to put the problem of joblessness at the forefront of their summit.

European Council President Herman Van Rompuy, who chairs the meetings, said last week youth unemployment was one of the most pressing issues for the 27-nation European Union as a whole.

Ministers from France, Italy and Germany, meeting in Paris this week, called on their counterparts to help tackle youth unemployment, with German Finance Minister Wolfgang Schaeuble describing it as a "battle for Europe's unity".

In April, 5.6 million people under 25 were unemployed in the European Union, with 3.6 million of those in the euro zone.

Even if governments take on unions and vested interests to enact reforms, they will take time to produce benefits.

The impact of the euro zone's debt and banking crises has been sapping confidence from companies and households.

Private consumption saved Germany from slipping into recession in the first three months of this year, but retail sales still fell unexpectedly in April because of the cold European winter.

Meanwhile, French consumer spending dropped again in February, falling by 0.2 percent after contracting in January. French household purchasing power contracted in 2012 for the first time since 1984.