Europe’s New Austerity: Corporate Cutbacks

Earnings season in the euro zone has been marked with a raft of job cut announcements, demonstrating how the sovereign debt crisis is affecting the private sector and signaling more trouble ahead for the region.

Europe’s New Austerity: Corporate Cutbacks
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Swiss bank UBS, which announced 10,000 job cuts and started enacting them the day after the announcement, was probably the most high-profile of the recent wave. But plenty of other banks – and other big European names – have joined them in recent days.

On Wednesday, telecoms equipment group Ericsson, Dutch bank ING, steel group Kloeckner and engineering firm Bombardier announced thousands of job cuts. Even countries in the Nordic region seen as safe havens are being hit.

Recent Purchasing Managers Index (PMI) figures have prompted concerns that the slowdown in the euro zone is spreading to countries like Germany, which have previously been relatively immune.

"Companies are really struggling in this environment, in part because of what's happening with banks having to deleverage and starting to run out of collateral," Megan Greene, director of European economics at Roubini Global Economics, told CNBC.

"Banks are being lent on very heavily by governments to buy up sovereign debt."

Spain's successful debt auction on Thursday was one of many boosted by the backing of local banks.

Many economists, including Greene are now warning unemployment ratescould rise again in 2013 and 2014 – although there is usually a lag of six to nine months between job cut announcements and their effect on unemployment rates.

"So far, the private sector has done a very good job of compensating for the public sector job cuts. I doubt that will continue, and perhaps the recent job cuts that have been announced suggest a turning point," Vicky Redwood, chief U.K. economist at Capital Economics, told CNBC.

"Rising unemployment will actively hamper the recovery and consumer spending, and we should see that coming through in the next three to six months."

Plans to reduce public sector debt could also be impacted by reduced income tax receipts and declining tax returns from consumer spending.

The U.K. government will have to revise its public borrowing figures for this year because of the worse-than-expected environment, Redwood believes.

In the U.K., around a million extra private sector jobs have been added in the past couple of years, but not at a sufficient pace to replace public sector sector job losses.

"In the long term, the private sector will be strengthened by having smaller government," Ryan Bourne, head of economic research at the Center for Policy Studies, told CNBC.

He argued that the European crisis is fundamentally one of competitiveness, and that the current problems were in part prompted by failure to reduce the public sector quickly enough in countries like Greece and Spain.

"In the first two years of the crisis, there was far too much emphasis put on the need to balance budgets and less on some of the structural reforms needed in labor markets or tax systems," Bourne said.

Without job growth, in either the public or private sector, Greece's "debt recession spiral" will continue as growth shrinks, Bourne pointed out. And without the ability to attract investment by devaluing its currency, the case for an exit from the single currency may grow, he warned.

—By Catherine Boyle, Staff Writer,