Soaring Euro Zone Joblessness Pressures ECB For Stimulus Action

Rising levels of unemployment, which are expected to worsen later this year, exacerbate threats to the euro zone's survival.

The number of unemployed people across all 17 countries within the euro zone soared by 11.2 percent to 17.8 million in June while unemployment among people younger than 25 rose to 22.4 percent, Eurostat, the European Union's statistical agency, reported on Tuesday.

Acute joblessness constitutes a grim reminder that the repercussions of the monetary union's 3-year-old debt crisis are spreading their tentacles beyond financially distressed governments, such as those in Spain and Greece, which fared the worst in June with joblessness rates at 24.8 percent and 22.5 percent, respectively.

Italy and France, which have made some progress in implementing structural reforms to free up their labor markets, also saw a worrying rise in unemployment, which jumped to 10.8 percent and 10.1 percent, respectively.

Unemployment in Germany, Europe's largest economy, slipped a marginal 0.1 percent to 5.4 percent from the month before. Joblessness in the Netherlands held steady at 5.1 percent. 

The latest unemployment figures urge policymakers at the European Central Bank (ECB) to come up with a plan to stem the incessant nosebleed from the sovereign debt crisis and step up its growth stimulus measures during its meeting on Thursday. 

"Unemployment, with the high level of inflation, is likely to put a lot of pressure on household income, which will cause an actual fall in spending power in the last quarter this year," said Jennifer McKeown, senior European economist at Capital Economics.

A drop in consumer spending, which accounts for 56 percent of GDP across all countries in the euro zone, could worsen unemployment as businesses would be forced to shed more jobs, with consumption declines taking a heavy toll on revenues and net earnings, she said.

Even as the ECB faces pressures to stem the deepening recession, policy makers may refrain from cutting benchmark rates further since inflation is wedged at 2.4 percent for the third consecutive month, economists say.

Meanwhile, Europe's financial leaders are waging another battle to pull the euro zone out of recession. The ECB will do "whatever it takes" to save the euro, its president, Mario Draghi told investors and reporters in a speech last week.

Yet, the ray of sunshine that passes through the storm clouds of the debt crisis is getting dimmer in spite of investors' hopes that the central bank will gulp down a giant sprig of Spanish and Italian bonds to curtail its rising borrowing costs. But other euro officials squashed those hopes with statements that the ECB will need further measures of reform before it can haul debt-ridden nations out of the quagmire.

McKeown points out that there are two ways the euro zone can climb out of the mess: ramping up its exports to other nations and introducing government-sponsored growth reforms.

"But, given that global demand is weak," the benefits that jump-starting exports will have are slim, McKeown said. "The government should spend more money to stimulate the economy. Fiscal coordination is needed if the euro zone is to stay together, and European governments should stem their rise in borrowing costs."

For now, the options that lie at the ECB's disposal seem limited.