Today’s Trend Buster Award goes to… Greece and Romania – the only two of the 27 European Union nations whose jobless rates fell in April.

The Donkey Award goes to… everyone else, whose rising unemployment rates sent the overall EU jobless rate to 8.6% in April from 8.4% in March.

And the 16 nations that make up the Eurozone contributed to its unemployment rate hitting a 10-year high of 9.2% in April – up from 8.9% in March and 6.8% in April 2008.

Among the lowlights for Europe’s heavyweights was a 7.7% jobless rate in Germany, 8.9% in France, and a whopping 18.1% in Spain, largely due to the collapse of the Spanish housing market.

Let’s take a look at the short-term silver lining and long-term storm clouds…

Job Loss Fear Drives Production And Trade

While the job market is a crucial measure of a country’s economic health, it’s important to remember that it’s a lagging indicator. It stands to reason that conditions must generally improve before employers start hiring new workers.

And while Europe’s economy isn’t set to spring higher any time soon, two pieces of data suggest that it could at least be on the long, slow road to recovery.

First up… in a gloomy climate, full of fear of job losses, it seems that industrial workers who’ve managed to retain their jobs have upped their productivity.

The Markit Eurozone Manufacturing Purchasing Managers Index (which is surely a leading contender for “Longest Index Name Ever”) showed the largest monthly increase in factory production in 12 years. From a level of 36.8 points in April, the index rose to 40.7 points in May – its highest level in seven months.

However, that’s still well below the dividing line of 50 points that indicates growth within the sector, so there’s a long way to go yet.

Second, while the headlines showed a 2.5% first quarter GDP contraction for the Eurozone, the 16 nations did at least notch up their first trade surplus in nine months. Figures from Eurostat showed a 400-million euro ($538 million) surplus in March, which surprised economists who’d called for a 300-million euro deficit.

Overall, the EU shaved its trade deficit down from 10.8 billion euros in February to 9.5 billion euros in March.

But over the next 12-18 months, Europe could face more employment problems, which could crush consumer spending…

Europe To Get Whacked From Welfare Changes

Job-wise, it seems that the U.S. and the Eurozone are treading down the same path…

With a “deep and extended economic contraction, depressed business confidence and deteriorating profitability” in the Eurozone, according to HIS Global Insight’s chief economist Howard Archer, it seems only a matter of time before Eurozone unemployment hits double-digits – just like economists predict for the U.S.

But Europe faces a big problem.

In addition to a sagging economy putting pressure on the job market, changes to the welfare state system could cause a serious consumer spending aftershock.

Originally set up to stabilize the region in the wake of World War II, Europe’s welfare state aims to protect workers (and subsequently the broader economy) from economic downturns and unemployment. And during the current recession, some argue that state-subsidized programs have prevented an all-out depression in Europe by helping to shore up consumer spending.

Some state subsidies allow struggling companies to keep experienced workers who could otherwise be laid off, but do so at reduced salaries, thus lowering their overheads.

But these subsidies are short-term in nature – and some programs are due to expire next year. And with the European Union facing an estimated 10.9% jobless rate in 2010 (about 25 million of the eligible workforce), the absence of safety nets like this could trigger another spike in unemployment and consequently cripple consumer spending.

That is unless these programs are extended, or EU economic growth has recovered sufficiently to spark new hiring (or at least stem the tide of layoffs) and keep consumers spending.

Low interest rates and the billions in stimulus money might help. But with the EU’s employment policy powers limited (individual nations are largely responsible for their own job market policies), the long-term health of the region remains uncertain if that doesn’t happen.

Right now, the big boys like Germany, France, and Spain are struggling mightily. Switzerland just slipped into recession, too. And that’s not to mention the poorer, heavily indebted nations (like those in Eastern Europe) that aren’t as well-equipped to deal with continued GDP contraction and rising unemployment.

If current trends continue, Europe could be sailing towards an even harsher economic storm

Martin Denholm
Smart Profits Report