* Monti sees EU institutions, Germany, willing to act
* Hollande says Italy, Spain need reward for efforts
* Capital flight accelerates from Spain in May
* Germany reiterates no bank licence for ESM
* Near-bankrupt Greece says cash reserves drying up
By Philip Pullella and Eva Kuehnen
ROME/FRANKFURT, July 31 Joblessness in the euro
zone hit on Tuesday its highest level since the single currency
was born, a further sign of economic desperation as hopes erode
that the bloc will be saved by its central bank this week.
An additional 123,000 people were out of work in the euro
zone in June, figures from Eurostat showed, bringing the
unemployment rate to a record high 11.2 percent across the 17
countries that use the single currency.
The rate hides wide divergences, with unemployment as low as
4.5 percent in Austria and as high as 24.8 percent in Spain,
where a shrinking economy makes it ever more difficult to pay
New data showed capital fleeing Spanish banks at a growing
rate. Spain has come dangerously close to losing affordable
access to financial markets, raising the prospect of a bailout
that would swamp the euro zone's hastily erected defences. If
Spain goes, Italy, with an economy twice the size, could follow.
Euro zone leaders have spent the past week issuing
statements promising to take whatever steps are necessary to
rescue the currency, but none have raised expectations as much
as Mario Draghi, head of the European Central Bank.
His announcement last Thursday that the ECB would do
whatever within its mandate to rescue the currency raised
expectations that he will deliver forceful new steps this week
to lower Spanish and Italian borrowing costs.
But market sentiment has since soured, showing that
investors doubt whether he can deliver.
Germany, which says it is illegal for the ECB to bankroll
government borrowing, squelched talk of any easing of its
opposition to letting the euro zone's rescue fund borrow from
the ECB so it could buy almost unlimited quantities of
Italian Prime Minister Mario Monti, who has campaigned for
concerted action by the euro zone's rescue funds and the ECB to
bring down ruinous borrowing costs for Spain and Italy, struck
an optimistic tone.
"It is a tunnel but ... some light is appearing at the end
of the tunnel. We and the rest of Europe are approaching the end
of the tunnel," he told RAI public radio before talks in Paris
with French President Francois Hollande.
Monti said decisions taken at an EU summit last month were
starting to bear fruit.
"We are now seeing the results both in the willingness of
European institutions as well as from the governments of
individual countries, including Germany," he said.
After lunching with Hollande, he said there was no time to
lose and they had discussed deadlines, adding: "We cannot afford
even a minute of distraction."
The ECB's Draghi promise last week to act to preserve the
euro raised investors' expectations of a resumption of a
long-suspended government bond-buying programme. Investors are
waiting to see what the ECB announces at a meeting of its
policy-setting Governing Council on Thursday.
"Today will probably be a quiet last day of the month.
Everybody is waiting for Thursday to see if Draghi can deliver,"
said Lex van Dam, hedge fund manager at Hampstead Capital, which
manages $500 million of assets.
"He'd better pull a big rabbit out of his hat."
However, central bank sources cautioned against expecting
dramatic action, saying bold moves could be at least five weeks
away because other elements must first fall into place.
They said Spain would first have to formally request a euro
zone assistance programme, which it has so far resisted doing,
and euro zone governments would have to agree to use their
rescue funds to buy bonds in tandem with the ECB.
Safe-haven German government bonds rallied on Tuesday and
European shares fell as scepticism over the prospect of bold ECB
action set in and Berlin repeated its opposition to a banking
licence for the rescue fund.
MONEY FLEES SPAIN
Monti, who will also visit Finland and Spain, said he was
confident Spanish Prime Minister Mariano Rajoy would be able to
tackle the country's problems.
The scale of Rajoy's challenge was highlighted on Tuesday
when figures showed that capital flight from Spain accelerated
in May, the month when Madrid was forced to nationalise the
fourth biggest lender, Bankia, and before euro zone
countries agreed to help bail out Spanish banks.
Capital outflows in the first five months of this year
totalled 163.2 billion euros - equivalent to about 16 percent of
economic output. The same period last year saw a net inflow of
14.6 billion euros.
Spanish retail sales fell by 5.2 percent year-on-year on a
calendar-adjusted basis in June, separate data showed, marking a
24th straight month of declines.
Near-bankrupt Greece meanwhile reported that it is fast
running out of cash as it awaits the next instalment of aid from
Deputy Finance Minister Christos Staikouras said that in the
absence of 3.2 billion euros needed to repay an ECB bond on Aug.
20, Athens would lack the money to pay everyday public expenses
ranging from police and other public service wages to pensions
and welfare benefits.
"Cash reserves are almost zero," he told state NET
television. "It is risky to say until when (they will last) ...
but we are certainly on the brink."
REWARD HARD CHOICES
Speaking to reporters in London on Monday evening, Hollande
voiced support for Monti's campaign to persuade euro zone
leaders and institutions to act to reduce Italian and Spanish
"European solidarity is of course about laying down
discipline, but it's also about allowing countries that made
hard choices to be rewarded with lower interest rates," Hollande
said during a visit to the Olympic Games.
"If countries undertake austerity measures and still have
very high interest rates, how can they win the trust of their
people?" he said.
Monti spoke by telephone over the weekend with German
Chancellor Angela Merkel, who is holidaying in northern Italy.
Berlin agreed in principle at an EU summit in June that the
euro zone rescue funds could buy bonds of countries that risk
losing market access, but was angered when Monti said that such
support should not entail any stricter economic conditions or
There has also been renewed pressure from France, Italy and
some central bankers to give the euro zone's future permanent
rescue fund a banking licence so it can borrow money from the
central bank to fight bond market contagion.
The Sueddeutsche Zeitung said supporters of the idea were
gaining ground in the euro zone, but the German Finance Ministry
reiterated its opposition on Tuesday, sending markets down.
A legal opinion commissioned by the ECB in March 2011
concluded that such a move would breach an EU treaty ban on
monetary financing of governments.