A ‘Youth with no Future’ protest in Madrid. Photograph: Susana Vera/Reuters
“We have not yet emerged from the crisis,” Mario Draghi said, predicting that the recovery for most of the eurozone would not begin until the second half of 2013. He urged governments to tighten budgets and implement a banking union to leave behind a “fairy world” that led to the financial meltdown three years ago.
“The crisis has shown that we were living in a fairy world,” he said, citing the unsustainable debts, weak banks and poor policy co-ordination of the past. Speaking at a conference in Paris, Christine Lagarde, head of the IMF, echoed his call for reform, saying: “Banking union seems to us to be the first priority.”
The euro strengthened against the dollar after the German parliament approved the latest €44bn (£36bn) bailout for Greece by a large majority, despite growing unease about the cost to taxpayers. It is thought the vote will strengthen Chancellor Angela Merkel, less than a year ahead of federal elections. Despite the criticism of the plan, only 12 members of her conservative-led coalition rejected the package – less than had been feared by party officials.
France’s finance minister, Pierre Moscovici, hailed the Greek aid deal as a breakthrough. “It’s a turning point for Greece. It’s also a turning point for the eurozone because it helps recreate stability and confidence. Greece’s fate will no longer be a daily issue.”
But investors said the celebrations should not be overdone. Jason Conibear, trading director of Cambridge Mercantile, said: “Certainly the Greek bailout is back on track, and the immediate prospect of Eurogeddon has receded. But even if the single currency is not about to come apart at the seams, the eurozone is still stuck in a deep economic funk.”
Another 173,000 people joined the jobless queues in the eurozone in October, pushing the unemployment rate to a record high of 11.7%. There were stark differences between northern and southern European countries, with Austria seeing unemployment of just 4.3% compared with Spain‘s eye-watering rate of 26.2%. Across the 27 member states of the EU, unemployment also rose, although to a lower 10.7%.
Graeme Leach, chief economist at the Institute of Directors, said: “This is extremely bad news – it is clear that the instability in the eurozone is not going away, which will impact negatively on the UK.”
Young people, in particular, struggled to find work and youth unemployment in the eurozone hit 23.9%, up from 21.2% in October last year. There are now 3.6 million people under the age of 25 out of work in the region. Spain was among the worst hit, with 56% of its young people out of work.
Spanish pensioners were also punished on Friday, with news that Madrid has cancelled an inflation-linked rise in pensions this year. This was the last remaining campaign pledge by prime minister Mariano Rajoy yet to be broken. Labour minister Fatima Banez said: “It was a difficult, painful decision because it was the last thing we wanted to do, but we had no other choice.” Madrid said a 2.9% increase in pensions would jeopardise the country’s deficit targets. Instead they will be lifted by just 1% – 2%, which is expected to save the country €3.8bn.
In the eurozone, inflation dropped much more than expected to 2.2% in November, from 2.5% in October. That will ease the pressure on European household incomes and could prompt an interest rate cut from the ECB, as policymakers will be less concerned that cheap debt is fuelling inflation. Howard Archer, chief European economist at IHS Global Insight, said: “With the underlying inflation situation in the eurozone looking far from alarming, we believe that the ECB has ample justification and scope to take interest rates down from 0.75% to 0.5%.”