EU deals on banks and budget lift mood
European officials struck two significant deals on banking resolution and their long-term budget in last-ditch negotiations early on Thursday, giving EU leaders a much needed lift at the start of a summit on youth unemployment and growth.
After late-night talks in Luxembourg that followed 18 hours of unsuccessful bargaining last week, European Union finance ministers finally agreed how to share the costs of future bank failures among investors and wealthy savers.
Separately, negotiators for the European Parliament, the European Commission and EU member governments clinched agreement on a €960bn ($1.25 trillion) seven-year budget for the bloc for the period 2014-20, ending months of squabbling.
That cleared the way for a drama-free summit, at which EU Council President Herman Van Rompuy said the 27 leaders, joined by industry and trade union represenatives, aimed to achieve results for young job seekers and small businesses.
They would adopt concrete measures to tackle "the credit crunch that is holding back the very companies that should be driving the recovery", Van Rompuy told the opening session.
Designed to shield European taxpayers from having to foot the bill for rescuing troubled banks, the banking resolution deal will be implemented on a national basis from 2018.
It also lays the ground for a single system to resolve failed banks in the euro zone and the 27-nation EU, the second stage of what policymakers call a European banking union, meant to strengthen supervision and stability of the financial sector.
The European Commission, the EU's executive, will put forward proposals for a single resolution mechanism next week, but any deal on it is a long way off because EU paymaster Germany opposes taking any liability for other countries' banks.
German Chancellor Angela Merkel welcomed the breakthrough on the EU budget, saying it would allow new spending on everything from agriculture to research, roads, bridges and development aid to move ahead.
"This is about improving our competitiveness with an eye to global competition and not mainly about creating ever new pots of resources," she said on arrival at the summit.
The European Parliament, which has gained greater power in recent years, had held up approval to demand more flexibility in how the money is spent and the right to redirect unspent funds instead of returning surpluses to member states.
In the end, a compromise was struck to the relief of EU officials, not least because the plan includes 6 billion euros EU leaders want to bring forward to launch programmes to fight youth unemployment the focus of the summit.
Low growth, no job
With two major obstacles out of the way, EU leaders faced a far less awkward agenda during the two-day summit focused on unemployment, the most devastating legacy of the crisis that has bedevilled the EU since 2010.
The last summit before Germany's September general election a key date in Europe's political calendar - may prove to be one of the least contentious of the past three years.
It is a far cry from the peak of the debt and economic turmoil of late 2011 and early-to-mid 2012, when there was a real threat of the euro zone collapsing.
Since then, thanks largely to a promise by the European Central Bank last July to do whatever it takes to defend the single currency, pressure from financial markets has eased and EU leaders have made some progress in reforming their economies.
As well as strict new rules on budget deficits and tighter oversight of budget spending plans by the European Commission, steps have been taken to improve banking supervision and weaken the link between indebted countries and problem banks.
British Prime Minister David Cameron, under pressure from eurosceptics in his own country, said the budget compromise must not affect Britain's annual rebate from EU coffers.
EU officials said a change in way rural development is funded in eastern Europe could potentially reduce London's entitlement to repayments by up to €350m a year, but they said a technical solution could be found.
From late next year, the European Central Bank will become the single supervisor for virtually all the euro zone's 6,000 banks the first stage of banking union.
The next step, the creation of a single resolution mechanism, is likely to prove a deeply divisive and drawn out process, with sharp differences between the views of the EU institutions, Germany, France and other member states.
Further-reaching plans for a single bank deposit guarantee across the euro zone look unlikely to gain traction due to German and north European opposition, although officially the idea remains on the table.
Most of Europe has been either in recession or on the brink of it for the past three years, while unemployment has steadily risen. EU unemployment now stands at 11%, the highest since records began, with youth unemployment a particular problem, especially in Spain, Greece, Italy, Portugal and Cyprus.
EU leaders have agreed to invest €6bn in a "youth employment initiative" that would offer people under 25 a promise of a job, training or apprenticeship within four months of leaving education or being unemployed.
It's a bold promise, and one that will be targeted at regions of the EU where youth unemployment exceeds 25%, including much of Greece and Spain.
Politicians and sociologists are worried that extended unemployment for young Europeans will lead to a "lost generation" that never gets fully incorporated into economic life, with deep psychological and financial implications.
That will even further undermine Europe's ability to boost growth and compete with the rest of the world, especially China and a United States that is shifting its focus to Asia.
Syria doubles diesel prices
Syria has nearly doubled the price for diesel fuel to cut back on the cost of maintaining generous subsidies to the population after two years of war that crippled its economy.
The new official price of £60 (33 US cents) for a litre of diesel from state petrol stations is still a fraction of the commercial price for the fuel on the black market, the only way it is available in many parts of Syria.
Even in government-held areas, petrol stations that sell subsidised fuel at the official price often run out or experience long queues.
Syria's government boasts that it has managed to maintain subsidies on food, fuel and energy that give it some of the lowest official prices in the region, despite a war that has killed 93 000 people and displaced millions.
However, it is not clear how much of the subsidised goods actually reaches the population. The United Nations says many Syrians have little access to subsidised bread and have to pay commercial prices many times higher.
Businessmen and trade officials said this week's diesel price increases, which were not publicised widely, reflect growing official concern about the hard currency cost of imports needed to maintain the subsidies.
The price of a litre of diesel, used for transport, as heating oil and to power army tanks military vehicles, was raised to £60 from £35, the biggest hike since the war's start. The price of gasoline, now £85 a litre, has not yet gone up but is also expected to be raised soon.
Before the war diesel was sold for £20 a litre under a subsidy programme that then cost $8bn a year.
The pound has lost about 75% of its value against the dollar during the conflict. Economists warn that Syria could be heading for hyperinflation with inflation running at around 60% since the start of the year.
Western sanctions do not bar companies from selling diesel to Syria, but restrictions on some financial transactions have raised the cost of imports and cut the exports that Syria uses to raise hard currency.
"With the increase in the value of the dollar, import costs have doubled. Our ability to export has dropped and on the other hand imports have increased in value and quantities," Economy Minister Mohammad Zafir Muhabik said in an interview with state television.
A source close to a government procurement agency, who requested anonymity, said the price hike was given impetus by the increasing need to route imports over land through Lebanon rather than through Syria's own Mediterranean ports. The source said imports through Lebanon in the first four months of this year were already equal to all of 2012.
Imports via Lebanese ports incur lower insurance costs than through Syria's Mediterranean ports and provide better security of supply to Damascus. Syria's own ports are far from the capital over routes through areas that have seen fighting.
Smaller shipments from Iran have also arrived by sea to Syria's Latakia and Tartous ports in recent months. Syria sends surplus gasoline to Iran in return for Iranian diesel.
Rebels control most of Syria's main eastern oil producing areas that produced around 380 000 barrels of crude oil daily, starving the government of a major hard currency earner.
Syrians have been grappling with fuel supply shortages for months, with areas under rebel control worst hit. That has helped reduce the cost of the subsidies for the government, since so many Syrians have no access to subsidised goods.
"We are facing worse shortages in our besieged areas, where people are relying on the black market instead of risking going through road blocks to petrol stations in regime-held areas," said Rami al-Sayyed, a resident of the southern, rebel-held Damascus neighbourhood of Hajar al-Asswad.
The price hike follows a debate within the Syrian cabinet and government whether to reduce subsidies, which use up two thirds of the budget. The government has also argued that raising prices will reduce smuggling of oil products out of Syria to neighbouring countries such as Lebanon and Turkey.
"A lot of our petroleum products are being smuggled to neighbouring countries as a result of its low prices,' said Muhabik.
The price increases in petroleum products have neutralised the impact of public sector salary increases on Saturday of between 20 to 40% that were announced to ease the social impact of the plunge in the local currency.
Already, public transport costs have shot up by an a average 20% this week alone, residents contacted by phone said. Many bakeries rely on subsidised diesel to run their ovens.
French consumer morale hits record low
French consumer confidence has hit an all-time low, the latest survey showed on Thursday, just as the state auditor warned that a likely economic contraction would knock the government off course on this year's deficit reduction target.
The June consumer confidence index fell to the lowest level since records began in 1972 and households are more pessimistic than ever about their future living standards, data from the national INSEE statistics institute showed.
The trend suggests that Europe's second-biggest economy, hit by lagging trade competitiveness and caught in a shallow recession, will not be able to count on its traditional driver of consumer spending to rebound.
The Cour des Comptes, a quasi-judicial body that oversees state accounts, warned in an annual review that with the public spending deficit heading for near 4% of economic output this year, missing a 3.7% official target, structural reforms must be implemented immediately to cut spending.
"Large doubts weigh on the flow of corporate and sales tax revenues," the auditor said in its 250-page review.
The body's president, Didier Migaud, told lawmakers as he presented the document that "reforms enabling a reduction in the weight of public spending seem more necessary than ever."
French GDP shrank 0.2% quarter-on-quarter in the first three months of the year, INSEE data confirmed this week. The government sees full-year growth at 0.1%, but INSEE and the European Commission both forecast a 0.1% drop.
The June consumer confidence index came in at 78, three points below analyst expectations of 81 and far below a long-term average of 100, data from statistics office INSEE showed.
The view by French households on how their living standards would evolve also came in at the lowest in over four decades, while more people said they felt now was the right time to save and fewer planned important purchases.
The gloom is being driven by record-high jobless claims and growing doubts that President Francois Hollande can make good on his promise to reverse the unemployment trend by the end of the year.
Adding to the gloom, weeks of cold and rainy weather have left retailers with huge stocks of unsold summer clothes, forcing them to offer huge discounts of up to 80% as sales kicked off this week, although even rock-bottom prices had yet to make an impact, store owners complained.
"It's really terrible. Sales are really low, we've never seen such a drop," said Celeste Touboul, who manages two clothes shops in central Paris with her husband.
For the first day of sales on Wednesday, they met the very low target they had set themselves, she said, with turnover 50 percent down on more normal years.
"Don't even talk to me about the weather, it killed us even more, the season is ruined," Touboul said in her shop of colourful dresses, tops, and bags amid big "Sales" signs.
INSEE said last week that with subdued consumer demand weighing, growth would be too weak this year for the economy to start creating new jobs. It also forecast that the unemployment rate would rise to 11.1% by year-end, up from 10.8% today and just shy of a 1997 record of 11.2%.
The statistics office will publish May consumer spending data on Friday. French consumer spending fell last year for the first time in 19 years.
Eurozone's jobless sit tight
The car plant where 46-year-old Agathe Martin works is shutting down, but when PSA Peugeot offered her a job in another factory elsewhere in the Paris region she said "Non".
After 17 years working in the same plant, taking the job would have meant either a much longer commute or losing her cheap social housing and uprooting her two daughters in a move.
The single mother prefers to stay put and look for another job even if that will be hard amid soaring unemployment and with only factory work and small jobs on her CV. If all else fails, she will still have more than €60 000 in severance pay.
"I am lucky enough to have a small house with a rather modest rent and I would not find that elsewhere," Martin said, huddled in a bicycle shed to escape the rain with colleagues who had just cashed in their severance cheques.
More than 2 000km away on the sunny Italian island of Sicily, 47-year-old Calogero Cassia struggles with the same problems.
After losing his job nearly two years ago when the Fiat plant near Palermo where he had worked for 25 years shut down, the father of three would be happy to take any kind of job in the area, where he has strong family ties.
But he worries that he does not have the skills to transfer to other sectors.
"If you look around it is just desperation, you find nothing, we can't manage," he said. The Termini Imerese plant, the main local employer, shut because of its remote location on an island south of mainland Italy, with 2 200 workers affected.
In both countries, hit by industrial decline and factory shut-downs, the lack of mobility fuels raging unemployment, adding to recession and lagging competitiveness.
Too many workers are unwilling or unable to move from one sector to another or one region to another, due to a debilitating mix of factors from high real estate prices to deficient training and family dependency.
The immobility in wealthier "old Europe" is a contrast to the hundreds of thousands of workers from poorer central and eastern Europe who took advantage of the EU's free movement of labour to flock westwards in the mid-2000s in search of jobs.
About 19.2 million people are now out of work in the 17-nation eurozone, a top priority for EU leaders who meet on Thursday and Friday in Brussels, but with little concrete relief to offer.
Housing costs
The number of jobless is at a record high in Italy, where it reached 12% in April, and in France, where anlysts polled by Reuters see it at 11.5% in the last quarter of 2013. Among young people, the unemployment rate is more than double.
So greater movement across jobs and regions is an imperative at a time when whole sectors are struggling and factories closing, says Herve Boulhol, the lead economist for France at the OECD think-tank.
"When a sector is in decline, restructuring and reallocation of jobs takes too much time in France. Some of the labour rules, including on collective redundancies, need to be trimmed, while training and assistance to find jobs must be improved," he said.
People move eight times less among the EU's 27 member states than between the 50 US states, according to OECD 2010 data.
This is partly due to language barriers. But even between regions of a same EU country, mobility is still nearly two-and-a-half-times lower than among US. states, data on the EU's 15 oldest states shows.
More people from crisis-hit southern EU now want to move to the wealthier north, but mobility within countries is still low, the European Commission said in a report on Tuesday.
A key obstacle in France is the jump in real estate prices in the past decade, with 40% of French businesses blaming housing problems for difficulties in recruiting staff or transferring them to another location.
People who have rented the same home for years will lose out if they move, especially if they have to give up subsidised social housing.
For Peugeot worker Martin, this was the main reason not to accept the job offer in Poissy, west of Paris, when her plant in Aulnay-sous-Bois in the northern suburbs shuts down next year as the loss-making French group tackles production over-capacity by cutting 8 000 jobs nationwide.
She pays just €320 per month for a modest house with a garden south of Paris, thanks to a deal struck between Peugeot and the local authority landlord. That is affordable on her monthly salary of €1 200 and a bargain in a region with the highest real estate prices in the country.
For those who own their home, high transaction costs, from notary and registration fees to taxes, are a major obstacle to moving, which the government plans to tackle with tax breaks.
France has the second-highest housing transaction costs among 33 OECD countries in a study the think-tank based on 2009 data nearly three times higher than in the United States.
Skills mismatch
Italy is a nation of home owners and many young Italians live with their parents.
While younger people with fewer ties are more likely to move abroad or to the wealthier north, they can be put off by the types of work contract they are offered, said Raffaele Fabozzi, professor of labour law at LUISS University of Rome.
"A young person who has to move to another region has to pay for their rent ... so if they don't have a stable contract they don't have any reason to leave their family home," he said.
Italy, like France, has a two-tier labour market that gives protection and benefits to salaried workers and hardly any rights to hundreds of thousands of mostly young people on temporary contracts. In the current recession, employers have become even more reluctant to hand out long-term contracts.
Unemployed people also face difficulties moving to new sectors due to limited retraining and qualification services.
Welfare spending in Italy has traditionally focused on pensions, while spending for labour policies has been more limited, said Luca Paolazzi, head of the research unit at employers' lobby Confindustria.
"We have few active policies to boost work. We have few training, education and requalification capacities and ability to move workers from one sector to another," he said.
In France, government officials acknowledge privately that too much is spent on generous unemployment benefits and not enough on training. But reforming the unemployment benefit fund, is a matter for negotiation between labour unions and employers, due to begin this autumn.
Rudy Tichy, who heads a public employment agency in Altkirch in the eastern French region of Alsace, said the closure of big plants in former industrial regions such as his triggered a skills mismatch which requires people to either move or retrain.
"Half of the people registered here have industry sector profiles but the jobs on offer are in the services sector, personal assistance to people, trade," he said.
Family ties
Beyond that experience mismatch and the practical difficulties of moving a family and making sure both spouses have a job, "French tradition means people simply don't have geographic mobility in mind," said Tichy.
While France has an extensive network of childcare services and subsidies, in Italy, many families rely on grandparents to help look after children, which also makes it harder to move.
In Lazio, south of Rome, 57-year-old Guerino Ventre is struggling to make ends meet with the roughly €1 000 a month he earns for working about 10 days a month since Fiat's Cassino plant in Lazio started running at reduced hours.
But the father of three grown children, who has been working in the plant for 34 years, said he doesn't want to leave the region, where most of his relatives live.
"I have my family here now, my things. And then there is the question, where to and to do what? All plants are experiencing the same situation, so moving does not make a difference."
US consumer spending rebounds
US consumer spending rebounded in May and new applications for unemployment benefits fell last week, suggesting the economy remained on a moderate growth path.
Other data on Thursday showed contracts to buy previously owned homes surged to their highest level in more than six years in May, keeping the recovery anchored in the face of tighter fiscal policy.
"Economic growth is not over the top, that's for sure," said Chris Rupkey chief financial economist at the Bank of Tokyo-Mitsubishi UFJ in New York. "We expect, however, economic growth will be strong enough to bring unemployment down at an acceptable pace."
The Commerce Department said consumer spending increased 0.3% last month, reversing April's 0.3% drop. The increase was in line with expectations.
When adjusted for inflation, consumer spending rose 0.2% last month. However, the so-called real consumer spending for April was revised to show the first contraction in six months.
This suggests second-quarter consumer spending growth could slow a little bit more than economists had previously anticipated and hold back overall economic growth.
Consumer spending grew at a 2.6% annual pace in the first quarter.
Some economists pared their second-quarter gross domestic product estimates. Barclays cut its GDP forecast by 0.4 percentage point to a 1.4% annual pace, while Morgan Stanley trimmed its estimate to 1.5% from 1.6%.
The economy expanded at a 1.8% rate in the first three months of the year.
In a separate report, the Labor Department said initial claims for unemployment benefits fell 9 000 to a seasonally adjusted 346 000. The four-week moving average for new claims, which irons out week-to-week volatility, fell 2 750 to 345 750.
The claims report signaled little change in the pace of job growth. Employment growth has averaged 189 000 jobs per month so far this year.
"It appears that the underlying pace of layoffs remained stable during June. The other half of the employment equation, hiring, also likely held steady," said Guy Berger, an economist at RBS in Stamford, Connecticut.
Data tone improving
Recent data, including housing, regional factory activity, business spending plans and consumer confidence, have pointed to an economy that is regaining its footing after stumbling early in the second quarter.
That is broadly supportive of the view the Federal Reserve expressed last week that the downside risks to the economy's outlook have waned. Fed chairperson Ben Bernanke said the US central bank could start scaling back on the pace of its monthly bond purchases this year.
US stock were trading higher in morning trade. The dollar touched a session high against the yen, while prices for US Treasury debt pushed higher.
The economy's stabilizing tone was underscored by a report from the National Association of Realtors showing signed contracts in May to buy previously owned homes surged to their highest level since December 2006.
While part of the jump in pending home sales reflected a rush by buyers to lock in deals before mortgage rates climbed higher, it was also a sign of underlying strength in the housing market.
The NAR's Pending Home Sales Index, based on contracts signed last month, increased 6.7% to 112.3.
The improving growth theme held as other details of the Commerce Department report showed income grew 0.5% last month, the largest gain since February, after nudging up 0.1% in April. That reflects a steady pace of job gains.
Households also saved a bit more last month, lifting the saving rate to a five-month high of 3.2%.
There was also a bit of inflation in the economy last month, pointing to some pick-up in demand.
A price index for consumer spending inched up 0.1% in May after declining two straight months. A core reading that strips out food and energy costs also rose 0.1% after being flat in April.
Over the past 12 months, inflation increased 1%, well below the Fed's 2% target but up from a 0.7% reading in the period through April.
Core prices were up 1.1% from a year ago, the same as in April. While that suggested some stabilization after a long period of disinflation, it matched a record low reached only a few times since the series started in 1960.
Falling healthcare costs have pulled core inflation lower, but Bernanke said last week that those prices should turn higher as he made the case for a likely reduction in the Fed's bond-buying stimulus later this year.
One Fed official, St. Louis Federal Reserve Bank President James Bullard, has said Bernanke should have waited for clearer signs inflation was turning higher before laying out the case for less Fed stimulus.
Deal struck on EU budget
"This is a good deal for Europe, this is a good deal for Europe's citizens, this is a good deal for the European economy," Barroso said of the agreement reached with European Parliament President Martin Schulz and Irish Prime Minister Enda Kenny, who represented member states.
Without the 960-billion-euro (1.25-trillion-dollar) budget, several of the measures being discussed Thursday at an EU summit to overcome the bloc's lingering economic crisis could not come into effect.
EU President Herman Van Rompuy welcomed the compromise, stressing that the seven-year budget was "an indispensable tool to help more young people to secure jobs."
"It must be effective as of 1 January 2014," he added, urging all parties to formally approve it without delay.
But many have argued that the funding plan, which represents the first real-term cut to a multi-year budget, does not go far enough to address the EU's economic woes.
Schulz said he would have to "fight in parliament for a majority" to approve the compromise, after lawmakers had rejected a previous deal, arguing that it did not fully take into account their demands aimed at maximizing resources.
"This is not what I thought would be the best solution, but it is the maximum I could, and we could, negotiate here," Schulz said. He said he would try to have the budget vote scheduled for next week's plenary session.
But initial reactions from parliament were mostly positive.
The European People's Party, the largest group in parliament, said the budget deal demonstrated responsibility "in times of economic difficulties," but avoided sentencing the EU to "seven years of rigour," in the words of chairman Joseph Daul.
Hannes Swoboda, the leader of the second-largest party, the Socialists and Democrats, said the deal was a "decisive improvement," and welcomed increased funding for youth employment schemes, as well as support for research and small and medium-sized enterprises.
But British lawmaker Martin Callanan, of the far smaller European Conservatives and Reformists group, complained that "too much EU money will still be spent on French cows and not enough on research and economic growth."
Irish Prime Minister Enda Kenny said he was "confident" that all EU member states would support the deal. Ireland holds the bloc's rotating presidency until the end of the month.
Under the compromise, the budget will be reviewed in a few years' time -a key demand of the parliament - but spending increases will be limited to a maximum of 7 billion euros for 2018, 9 billion euros for 2019, and 10 billion euros for 2020.
These ceilings are in response to member states' fears that budgetary demands could balloon in the course of such a review, once the worst of the economic crisis is over.
The deal also takes into account lawmakers' calls for flexibility, by agreeing to place unspent funding during the first few years of the financial framework into a pot, to be redistributed across the latter half of the budget period.
Kenny also pledged that member states would agree by July 9 to a second top-up for the 2013 budget, which is short of 11.2 billion euros according to the commission - thus meeting another condition of the parliament.
This is the first time the parliament has the power to sign off on the EU's expenditures.
Inflow of money in rich economies plummets
Developing countries have attracted more foreign direct investment than developed ones for the first time last year, the UN Conference on Trade and Development (UNCTAD) said on Wednesday.
The reversal came as the inflow of money in rich economies plummeted by nearly a third to $561bn in 2012.
On a global scale, direct foreign investments fell 18% to $1.35trn, with developing countries attracting just over half of the world's investment flows.
"The road to foreign direct investment recovery is bumpy," and increases would be only moderate in the next two years, Unctad said in its report, citing the fragile state of the global economy.
The United States remained the world's largest recipient of foreign investment, followed by China, Hong Kong, Brazil and the British Virgin Islands.
Britain, Australia, Singapore, Russia and Canada completed the top-10 list.
Investments in the Middle East fell for the fourth year in a row as foreign investors remained wary of political uncertainties, Unctad said.
At the same time, foreign interest in natural resources pushed up inflows to Africa and South America.
In Asia, foreign money shifted to Cambodia, Myanmar and Vietnam along with labour-intensive manufacturing.
