Eurozone’s Inflation up, Unemployment Down

The 13 countries that use the euro as their currency had an unexpected drop in their aggregate unemployment rate. Eurostat, the EU’s statistical office, announced that October’s rate was 7.2% down from 7.3% in September. At the same time, inflation hit a six-year high of 3%. This means that interest rates there won’t be coming down any time soon.

The eurozone economy also grew a bit in the third quarter, 0.7%. That’s up from 0.3% in the second quarter. Analysts say that that is consistent with the spending boom that preceded the credit crunch. As figures for fourth quarter 2007 and first quarter 2008 come in, they expect growth to drop again as the credit issues work their way through the economies of the zone.

That should argue for lower rates, but the unemployment and inflation numbers argue the other way. While no one seriously thinks the 4.0% interest rate set by the European Central Bank is too high, a wait-and-see attitude is prevalent among the bank’s big-shots.

This is bad news for US dollar fans, as the American interest rates are going to drop farther in the coming months. The interest rate differential with the eurozone will work against the buck and for the euro. Some have said $1.50 to the euro is not inconceivable.

This means Europe’s exporters and manufacturers will have trouble selling into the US, and that US exporters are going to do quite nicely out of their European operations. The Europeans will find the US is a very cheap place to take a vacation, and Americans will find most of Europe prohibitively expensive. And next month, there’ll be more data to muddy the waters.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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