Bad news for the 12.5 million people out of work from Sicily to Lapland -- the euro zone's hoped-for economic recovery next year is unlikely to spark job creation on a large scale. \nIn fact, unemployment in the 12 nations that share the single currency will fall only moderately in the next five years, to around 7.5 percent in 2008, unless governments do more to deregulate their job markets, according to the OECD. \nIt was 8.9 percent in June, Eurostat data showed. \n"If nothing is changed the OECD predicts the unemployment rate will average 8.25 percent over the period 2003 to 2008," said Laurence Boone, euro area economist at the Paris-based Organisation for Economic Co-operation and Development. \nThat compares with a projected 5.5 percent in the US. \nAs a result, jobless benefit payments will keep putting heavy pressure on Europe's public budgets, and the continent will stay lumbered with a built-in brake on growth. \nWith joblessness above four million in Germany, for example, Europe's largest economy cannot expect a consumer boom that would haul it out of almost three years of stagnation. \n"Even if there is a strong upturn in growth, job creation will remain muted," said Chris Williamson, chief economist at NTC Research, which compiles the monthly Reuters purchasing managers' indices for the euro zone, a key leading indicator. \nToo many hurdles \nThat is because it remains too costly, complicated and risky to create new jobs in Europe. \nFor one, companies are so skeptical about the strength of the upturn that they are not taking on new labor. \nEven as leading indicators such as Germany's Ifo business climate index have started to suggest a recovery towards the end of the year, top firms are announcing major layoffs. \nIndustrial firm Siemens AG said last week it was shedding 2,300 jobs at its struggling mobile phones unit, of which 500 will be in Germany. Electronics group Epcos AG said it would move more jobs abroad to cut costs. \nIn addition to skepticism about the upturn, high labor costs continue to block recruitment. In the euro zone, taxes and contributions eat up over 40 percent of gross wages. That compares with less than 30 percent in the US. \nA study by consultancy A.T. Kearney predicted that European banks will move 100,000 back office jobs abroad to low-cost countries by 2008 to counter competition and avert takeovers. \nAs if skepticism and high costs weren't enough, Europe's companies face stringent job protection rules, putting them off hiring workers they would have trouble firing again. \nAnd jobless benefit is so high in a number of countries that people shun low-paid jobs. \nChanges are under way in Germany, which is loosening job protection, cutting benefits and leaning harder on the unemployed to take on work. \nThe "Agenda 2010" package, though modest by comparison with reforms Britain implemented in the 1980s, is the right move but won't trigger recovery on its own, economists say. \nNo mobility \nLabor mobility is another problem, reflected partly in the wide divergence in jobless rates from 3.7 percent in Luxembourg to 11.4 percent in Spain. Germany and France share second place at 9.4 percent, according to Eurostat data for June. \nLanguage and culture are obvious barriers that may deter a French dentist from setting up shop in Helsinki. For that reason alone, mobility is unlikely ever to be as great as in the US. \nBut Europe's governments have done little to remove other obstacles, such as a lack of transferable pension funds and problems getting job qualifications recognized across borders. \nMeanwhile even the US, lauded for its low labor costs and flexible labor market, is showing evidence of economic recovery without robust job creation. \nA problem both Europe and the US face is a long-term drift of manufacturing jobs to lower cost countries such as China, with software and support jobs going to India. \n"Industrial jobs are being lost to low cost producers in Asia. And those jobs are unlikely to return when the recovery begins," said Lakshman Achuthan at the New York-based Economic Cycle Research Institute (ECRI). \n"China's the manufacturer and India's the back office, that seems to be the way it's shaping up." \nThat poses a particular risk for Germany, Italy and Spain with more than 30 percent of their workforce in industrial jobs. \nGermany: the big problem \nThe OECD estimates the euro zone will be able to create jobs next year provided growth matches its two percent forecast. \nBut there are doubts about how strong the recovery will be. Achuthan said the ECRI's long leading index, which looks ahead for nine to 12 months, remains weak for Germany, which accounts for a third of euro zone output. \n"The major problem that trumps everything at the moment is Germany," said Achuthan. \nGermany especially is being hemmed in by what has become another European structural problem -- the EU's Stability and Growth Pact that requires countries to limit their budget deficits to below three percent of GDP. \nBoth Germany and France are at risk of breaching the Pact for three years running, but nevertheless remain constrained by it, curbing their ability to copy the US in spending their way out of stagnation. \n"The limits are quite restrictive from the point of view of job creation," said Duncan Campbell, director of the employment strategy department at the International Labour Organisation, a UN agency that promotes labour rights and social justice.
ILLUSTRATION: MOUNTAIN PEOPLE
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