Unemployment Surge Continues to Plague Eurozone

Kenneth A. Orchard, CFA
Portfolio Manager, European Fixed Income

At the start of this year, we identified eight themes we wanted to watch in Europe during 2013.  This week we drill into the risks of potential social unrest in the region when factors such as high unemployment, fiscal change and structural reforms converge as these countries continue to seek a more integrated financial and political European Union.

Job creation was one of the most significant challenges that we cited in our January Eurozone outlook. It continues to mire the eurozone’s growth prospects (see chart below), especially in periphery countries. The eurozone average unemployment rate has reached an all-time high of 12.1% and appears to be on a rising trend. Most concerning, youth unemployment sits at extreme levels: 56% in Spain, 62.5% in Greece and 38.4% in Italy.

While the lack of protest so far has been surprising, we continue to believe that the risks posed by social unrest should not be underestimated. Italy’s election result in February demonstrated the growing popularity of antiestablishment parties (such as the 5-Star Movement) across Europe and the rejection of the economic reform agenda as well as wider European integration. High and rising unemployment brings significant risk of protest, but other factors also play a role:  fiscal cutbacks, structural reforms to weaken job protection of existing workers, allegations of high level corruption in many countries, from France to Spain to Greece. Determining the specific trigger of unrest is difficult—if it occurs at all—but the conditions are ripe for such a scenario, and investors need to be cognisant of these risks.

           Source: Eurostat.