Soaring unemployment levels across Europe are fuelling an anti-austerity backlash heading into crucial elections in France and Greece Sunday.
Employment data released Wednesday put the jobless rate of the 17-country euro zone at an all-time high of 10.9 per cent in March, up from 10.8 per cent in February. Some economists project it will breach 11 per cent, and keep going, as large economies such as Italy and Spain sink deeper into recession and drag the rest of the monetary union down with them.
A reading of the euro zone's manufacturing sector, also released Wednesday, showed it shrinking at the fastest pace in almost three years.
The grim employment figures came four days before the Greek general election and the French presidential runoff, and less than a month before the Irish referendum on the German-inspired fiscal compact, which sets strict budget deficit and national debt limits.
Some economists, strategists and political observers expect the ever-rising jobless numbers to swing more voters against the incumbent parties, which have largely endorsed the austerity measures demanded by Germany, the European Commission (the European Union's executive arm), the European Central Bank and the International Monetary Fund.
"The austerity backlash is the factor driving the French election," said Marshall Auerback, director and strategist at Toronto's Pinetree Capital. "The next stage will be when a mainstream – that is, non-populist – traditional party begins to run on an explicitly anti-euro platform."
In France, the Socialist candidate, François Hollande, is the front-runner and is expected to beat President Nicolas Sarkozy in Sunday's election. Mr. Hollande won the first poll last month by a narrow margin on a vow to water down, but not eliminate, the fiscal tightening endorsed by Mr. Sarkozy and his chief political ally, German Chancellor Angela Merkel. He also wants to recast the fiscal compact that was championed last autumn by Ms. Merkel.
While details of his economic platform are lacking, it appears Mr. Hollande wants to slow the pace of fiscal tightening for fear that harsh austerity measures demanded by Ms. Merkel would send the jobless rate soaring and push France, the euro zone's second-largest economy, into recession. Ms. Merkel, who had offered to campaign for Mr. Sarkozy, now says she will campaign against Mr. Hollande, whose lead over Mr. Sarkozy ranges from six to eight percentage points, according to various polls.
France is already on the verge of recession. Deutsche Bank expects it to eke out gross domestic product growth of a mere 0.3 per cent this year. The economies of Italy, Spain and Britain (which is member of the EU but not the euro zone) are contracting. Deutsche Bank expects the euro zone economy as a whole to shrink by 0.2 per cent this year.
Economists largely endorse Mr. Sarkozy over Mr. Hollande, because they fear Mr. Hollande will not rein in government spending or launch economic reform, jeopardizing France's credit rating and keeping wide budget deficits intact. In a recent note, Deutsche Bank economists Thomas Mayer and Jochen Moebert said that for economic and business confidence to return to the euro zone, "Spain and Italy have to stay the course and the new government of France has to join the club of reformers."
Voters' anti-austerity sentiment is expected to create political turmoil in the Greek elections, where no single party is expected to form a majority in parliament, in good part because the deepening austerity programs have extended Greece's recession into a fifth year. Assuming a coalition government is cobbled together after Sunday's election, "the even more difficult challenge will be to pass further austerity measures in the face of very hostile opposition coming from the newly empowered anti-austerity parties and the recession-weary public," said National Bank Financial geopolitical analysts Pierre Fournier and Angelo Katsoras.
If the austerity and economic reform measures get rolled back by the new government, there is a real risk of a Greek default and debt contagion in other weak euro zone countries, they said.
Some central bankers think Greece will probably have to leave the euro zone and reprint the drachma, which could be devalued. In an interview with The Globe and Mail last month, Mustapha Kamel Nabli, the Governor of the Central Bank of Tunisia and former senior World Bank economist, said "it's not impossible" that Greece will have to leave the euro zone.
"I do not see how you can have a country continue to be squeezed for 20 years, 30 years [by austerity programs and recession]" he said. "So Greece is still a big question mark. It's a question of time when another shoe has to drop."
The rising euro zone unemployment was driven by the deteriorating economies in Spain, where unemployment is now 24.1 per cent, Portugal (15.3 per cent) and Italy (9.8 per cent.). The figures "provide a clear indication of the short-term economic pain inflicted by draconian austerity programs," said ING economist Martin van Vliet.