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Euro zone morale climbs in shadow of record unemployment

Latvia's Prime Minister Valdis Dombrovskis and Finance Minister Andris Vilks (L) address a news conference on the adoption of the euro by La
Latvia's Prime Minister Valdis Dombrovskis and Finance Minister Andris Vilks (L) address a news conference on the adoption of the euro by La

By John O'Donnell

BRUSSELS (Reuters) - Optimism in the euro zone's economy improved sharply in August but stubbornly high unemployment, especially in the bloc's weaker countries, highlighted the fissure separating the recovering north from the struggling south.

Confidence among business managers polled by the European Commission rose for a fourth successive month in the euro zone, the EU executive said on Friday. The positive trend was particularly strong in Germany and the Netherlands but was also seen in Italy, France and Spain.

The measure of sentiment across the currency bloc in August, based on business orders, industrial confidence and other factors such as companies' hiring plans, increased by 2.7 points to 95.2.

Rising confidence has inspired some to predict that the 17 countries using the euro have overcome the worst of a crisis that was triggered by banks' investment in risky mortgage debt and later drove some states to the brink of bankruptcy.

"The most acute phase of the crisis and the toughest period of belt-tightening is behind us," said Dirk Schumacher, an economist with Goldman Sachs.

In a separate release, Eurostat, the European Union's statistics agency, said annual consumer price inflation in August would be 1.3 percent, down from 1.6 percent in the previous month, due mainly to a drop in energy prices.

A lack of price pressures is a further potential boon to the economy, giving households a little more spending power, and would allow the European Central Bank to stick to its record lower interest rate policy to try to help the economy.

But while morale improved, unemployment in the euro zone in July remained at a record high of 12.1 percent, although there is a huge variation in jobless rates between countries such as Germany, where the job market is robust, and Greece or Spain where more than one in four workers have no job.

"It would be the most dim-witted thing you could do to declare ... that the crisis is over," Juergen Fitschen, the co-chief executive of Germany's flagship Deutsche Bank, told reporters earlier this week in Brussels.

While just over 5 percent of workers in Germany were unemployed, according to Eurostat, that figure reached almost 28 percent in Greece and topped 26 percent in Spain.

Although there were 15,000 fewer people in the euro zone without a job compared with the previous month, 3.5 million people under 25 remain unemployed.

"We haven't broken the negative dynamic in the south of Europe," said Guntram Wolff of think tank Bruegel. "Banking fragility, weak growth and high unemployment still present a threat."

MIXED SIGNALS

A slowdown in euro zone inflation will give the ECB food for thought ahead of a September 5 policy meeting.

Its Governing Council discussed cutting interest rates in July but decided against and instead said it would keep them at record lows for an extended period.

Signs of economic recovery have since reduced pressure for a cut but the fall in inflation may prompt policymakers to have a rethink.

"All in all, while a recovery seems to be underway, there is every reason for the central bank to remain in strongly accommodative mode for the foreseeable future," Jennifer McKeown at Capital Economics wrote in a research note.

ECB policymakers have sent mixed signals in the run up to Thursday's meeting.

Cypriot central bank governor Panicos Demetriades said late last week that a rate cut was still "on the cards", adding that the most recent data was "more encouraging". But Austria's Ewald Nowotny saw no arguments to cut.

German Bundesbank chief Jens Weidmann said on Thursday that the longer interest rates stay low, the less effective monetary policy becomes and the more difficult it will be to withdraw support measures.

(Additional reporting by Paul Carrel in Frankfurt; Editing by Robin Emmott and Susan Fenton)

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