Europe Economy

'Draconian' Austerity Pushes Up Euro Jobless Rate: Analysts

After hitting the highest level since the euro's creation, unemployment in the 17-member single currency area will show no signs of abating, adding to worries that a prolonged recession may be in the cards, analysts said.

Cuts in budget expenditure due to "draconian" austerity programs will lead to big job losses in the public sector and consumers are likely to tighten their belts further, worried about job stability, according to various economists.

Data from the European Union's statistics office Eurostat showed on Tuesday that unemployment in the euro zone rose to 10.4 in December, the same as an upwardly revised figure for November and the highest since June 1998, before the introduction of the euro in 1999.

"We expect the unemployment rate in the euro area to continue increasing – possibly at a faster pace – and we think it is more likely to stabilize in 2013 than in 2012," Francois Cabau, an economist at Barclays Capital, wrote in a market note.

Only Germany and Slovakia bucked the trend, with unemployment falling to 5.5 percent and 13.4 percent, while Spain's was unchanged at 22.9 percent.

Portugal's jobless rate jumped to 13.6 percent while Italy's rose to 8.9 percent and Ireland's to 14.5 percent.

"Today’s euro zone unemployment figures make for worrying reading," Martin van Vliet, an analyst with ING, wrote after the figures were released.

He noted that survey measures of hiring intentions pointed to further increases in the jobless rate in the coming months.

Knock-On Effect

Other analysts pointed to the knock-on effect rising unemployment will have on a region that is, in all likelihood, already in the grip of a double-dip recession.

"Rising euro zone employment together with low consumer confidence and fiscal tightening will continue to weigh heavily on consumer spending," Jennifer McKeown, senior European economist at Capital Economics, said.

"With weak global demand holding back exports, activity in the region seems almost certain to contract this year even if policymakers manage to avoid a euro zone break-up," McKeown added.

Bill Gross, Pimco founder and co-chief investment officer, told CNBC that the European Central Bank's liquidity-providing operations will not solve the euro zone's fundamental problems, with the region needing jobs and growth to get out of its debt nightmare.

The EU and the euro zone have problems because of the North-South division, in which northern European countries have low debt and are export oriented, while the southern economies' debt ratios are high and their economies were based more on domestic consumption, Gross said.

Measures designed to keep budget deficits and debt in check will compound the problem, according to ING's van Vliet.

"The elevated unemployment rates in Southern-Europe are partly caused by structural factors, but also reflect the pain inflicted by the draconian austerity programs," he wrote.

"In that regard, one should welcome any decision to relax unrealistic fiscal deficit targets, as being contemplated in the case of Spain. The high and rising unemployment rates in the periphery cast a dark cloud over growth prospects in the euro region."