May 2, 2012 at 12:39 PM ET
Europe's two-year-old strategy of austerity isn't working. And there is no Plan B.
The latest evidence that government spending cuts are driving the eurozone deeper into recession came Wednesday with a report on soaring unemployment in the zone's weaker economies.
Overall unemployment hit a 15-year high of 10.9 percent in March, driven by layoffs in Italy and Spain, a tenth of a point higher than in February, according to Eurostat, the European Union's statistics office. That level of joblessness hasn't been seen since 1997, before the euro was introduced to world financial markets.
The average rate masks painfully high levels of unemployment in the hardest-hit countries. In Spain, which sank back into recession in the first quarter, the unemployment rate hit 24.1 percent in March, a level not seen in eurozone data stretching back to 1986. In Greece, more than one in five are out of work. In both countries, half of those under 25 are out of a job.
With deep government spending cuts only beginning, economists believe the jobless rate in Europe is headed higher.
"It now looks odds-on that the eurozone unemployment rate will move appreciably above 11.0 percent over the coming months with an ever-growing danger that it will reach 11.5 percent," said Howard Archer, economist at IHS Global Insight.
The recession has also begun to take a toll on Germany, the flywheel of Europe's economy and the driving force in the austerity measures imposed on debt-burdened countries with the weakest economies.
German unemployment ticked up last month for only the second time in 25 months, as other economic indicators showed the country's manufacturing sector contracting.
"This is a negative surprise," said Heinrich Bayer, an economist at Postbank. "Economic weakness seems to be taking a toll after all.... We are in a phase of stagnation."
European politicians and bankers have spent the past two years cobbling together a series of plans to force budget cuts on debt-burdened countries, including Greece, Italy and Spain, in return for a financial lifeline. Those efforts initially focused on Greece, which ultimately defaulted on a portion of its debt.
Now, other countries appear to be entering the downward spiral, as spending cuts force layoffs and undermine consumer and business confidence, driving local economies deeper into recession. As those local economies shrink, so do tax revenues - forcing deeper budget cuts and increasing the government's debt burden in relation to the size of its economy.
The leaders who backed those austerity measures now face voters at the polls.
"People - voters - are making it clear to politicians that they are tired of losing prosperity," said Carl Weinberg, chief economist at High Frequency Economics. "You can see that in the latest polls and surveys. It will be clear in national election results in Greece and France this weekend. Austerity is out: renewed economic growth is in."
Given the halting progress made by European leaders over the past two years, though, it remains far from clear whether they can agree on how to shift course and promote growth.
The recession has weakened an already shaky banking system, which is operating on life support from Europe's central bank. Much of that funding, though, is being channeled back into purchases of government debt floated to fill in deficits. As demand from private investors dries up, banks have become the lenders of last resort to their governments..
That's made it harder for private companies to get the credit they need to expand operations and hire more workers.
"We're not getting reforms anywhere in Europe," said Steen Jakobsen, chief economist at Saxo Bank. "The access to credit is not there because the governments continue to take a bigger slice of the credit cake. That is the problem."