Deepening social crisis threatens fabric of EU
BRUSSELS (Reuters) - The worst of Europe's sovereign debt crisis may be over in terms of financial turmoil but the region now faces a social crisis that has potential to tear the European Union and its single currency project apart.
Political and economic analysts speaking at the Reuters Euro Zone Summit said the decision last September by the European Central Bank to buy government bonds in unlimited amounts set a floor under one part of the crisis, but did nothing to prevent worsening social strife.
Rising popular unrest has been most immediately visible in the Italian election results, where voters overwhelmingly rejected the austerity programs supported by outgoing Prime Minister Mario Monti and advocated by the European Union.
Similar problems are brewing in Spain and Greece, where youth unemployment stands at 50 percent and people are facing a 'lost generation' of joblessness and frustration. Portugal, and to an extent Ireland, are in a similar fix. And there have been strikes and demonstrations from Belgium to Cyprus and France.
"If you look at unemployment in southern Europe, the situation is clearly not socially sustainable. The outlook for these countries is extremely bleak," said Zsolt Darvas, a research fellow in international economics at Bruegel, a Brussels think-tank that provides input to EU policymaking.
"There's a very high probability that if the economic situation doesn't improve in a very strong and visible way, governments will fail and the catastrophe will come, they will leave the euro," he said.
"They are in a spiral. The question is, when will it stop."
Greece, where it took two elections last year before a government was formed that backed the austerity program imposed by the EU, is a particular concern. And Italy, which may have to follow Greece in holding a second poll if a government does not emerge, is an increasing threat.
"The major risk is that the political system breaks down, that's still a major risk in Greece," said Darvas.
"If the current government were to fall apart, it would be extremely difficult to keep Greece inside the euro. We see in Spain the social pressure is increasing. In Italy, financial markets will decide what happens, they will wait for what emerges, but something radical may have to be done."
WILL IT GET BETTER?
There is a rising awareness among EU leaders and policymakers about the social dimension of the crisis, but it is only now, more than three years in, that steps are being taken to address the problem.
European labor ministers met in Brussels on Thursday to discuss steps needed to improve job training and employment and head off the threat that joblessness could destabilize the EU.
They agreed on a "youth guarantee scheme" focused on ensuring that young people under 25 receive either an offer of work, further education or work-related training at least four months after leaving education or becoming employed.
The scheme is part of a 6-billion-euro initiative to tackle youth unemployment in the worst-hit corners of Europe over the next decade, a plan that will be discussed in more detail at a meeting of EU leaders at a summit in Brussels on March 14-15.
But analysts are concerned the steps are too little, too late to heal unemployment which is set to scar the southern reaches of Europe for a generation to come.
Clemens Fuest, a research director in public finance at Oxford University and the incoming chief of Germany's ZEW economic institute, said he saw the social dimensions of the crisis worsening rapidly, especially in Spain and Greece.
"I absolutely think it can get a lot worse. That is really the current plausible scenario for a break-up of the currency union," he told the Reuters summit on Wednesday. "It may very well be that in these countries at some point the population will say 'we don't believe that things will get better'."
The choice at that point would either be for the euro zone to attempt a large-scale program of redistribution to the south, which Fuest said he did not expect, "or the decision to leave the currency union, devalue and try another way".
"I think the degree of desperation has to be high for people to take that risk. But if things continue, if unemployment goes up to 30 percent or something in Spain, there certainly is the danger that might happen."
(Additional reporting by Paul Taylor in Brussels and Paul Carrel in Frankfurt, editing by Mike Peacock)
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