Attention is directed to the decision to be announced by the European Central Bank on the rate proposed by the end of the week. Hopes are geared towards the possibility that the Bank will announce its willingness to buy Spanish and Italian bonds to control the surge in Spanish bond yields. The yields reached very dangerous levels and while through reading the economic data, economies continue to detect the worst to come. Today, a number of European economies led by Germany and Italy will announce their unemployment rates, which are expected to continue rising amid the strict austerity policies adopted by governments to contain the sovereign debt crisis.
We will start today's employment report by looking at the German economy during July, which is expected to witness a stable level of 6.8%. Italy’s rate of unemployment is expected to remain at a level of 10.1%. Euro zone will announce its unemployment rate during the same month, which is predicted to witness increased levels of 11.2% from the previous 11.1%, worsening matters in the zone, which has been and is still suffering from repercussions of the sovereign debt crisis.
Unemployment rates in the Euro zone were affected by European governments’ adopting of austerity policies which aimed at reducing the deficit in the general budget. These policies included reduction of labour wages as well as laying off many employees in the public sector, which in turn increased the difficulties faced in the Euro zone amid worsening crisis of sovereign debts.
Contraction of economic sectors, especially in the manufacturing sector, had a strong impact on pushing the unemployment rates to historic levels, as many factories and companies reduced the number of their employees in order to cut in their costs amid the losses faced by these companies and the decline in exports and demand for European products.
Spanish economy sits the throne of the highest unemployment rates in the Euro zone reaching levels of 24.6% during the second quarter of this year as the country sank into recession for the third quarter in a row. Note that the unemployment rates, which rose to these levels, indicate that the government is facing multiple difficulties which in turn supports the prediction that the country will only dive into a deeper recession.
Light is shed onto the European Central Bank, which is expected to announce its willingness to buy Spanish and Italian government bonds, in efforts to control the surge in bond yields to very critical levels. This what Mario Draghi had claimed previously, that the ECB will do whatever it takes to prevent the collapse of the single currency (i.e. the euro).
European Central Bank ought to focus on supporting growth more than focusing on maintaining price stability. This is especially so with the maintaining of inflation rates around 2.4%. Today the preliminary estimates for the consumer price index for July are expected to remain at 2.4%, and this is what gives the ECB the green light to adopt stimulus measures to support the pace of growth.
Continued high rates of unemployment in the Euro zone will increase the difficulties faced by the accumulating sovereign debt crisis; so that the increase in unemployment rates above the projected levels will amplify the losses for the euro and European equities, which are waiting for the results of companies led by UBS , BP, Bayer amongst other companies.