GLOBAL MARKETS: European Stocks Drop; Italy In Focus

- European stocks fall on fears that debt contagion may spread to Italy

- Investors dump equities, in particular banks, and favor bonds

- Euro falls against the dollar as debt worries escalate

- Attention on the EU group meeting in Brussels

By Michele Maatouk & Ishaq Siddiqi

Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--European stock markets fell Monday, along with the euro, with investors worried that Italy may be the next domino to fall as the euro-zone debt crisis continues to unfold. As a result, investors flocked to the dollar and core European government bonds.

Prudence Still a Watchword For Sweden Finance Minister

As Sweden's finance minister, Anders Borg has received much of the kudos for his country's relatively easy passage through the financial storms following the 2008 crisis. But now as things seem to be looking up, Mr. Borg—with a reputation for fiscal prudence—isn't going to loosen the purse strings. Rather, he is preparing for the next crisis.

"I have a very strong ambition to keep Sweden on the safe side," Mr. Borg says. "I have never in my life seen anyone taking damage from having too large safety margins."

Mr. Borg says his cautious approach stems from hard lessons learned during ...

Obama Challenges Republicans for Debt-Plan Details

President Barack Obama is challenging Republican lawmakers to present a plan for a smaller-scale deficit reduction program as he attempts to steer them toward his $4 trillion goal, a Democratic aide said.

Obama plans to hold a press conference at 11 a.m. in Washington today, his fifth public remarks on the debt in a week, as he presses lawmakers to reach an agreement to raise the $14.3 trillion U.S. borrowing ceiling before an Aug. 2 deadline. The president and bipartisan congressional negotiators agreed to meet every day until they reach a deal, said one legislative aide on condition of anonymity.

They are divided over taxes and entitlements. Republicans reject Democrats’ call for more tax revenue and instead are pressing to cut entitlement programs such as Medicare and Social Security. Democrats insist even the Republicans’ proposal for a smaller deficit-cutting plan must include more taxes from higher-income Americans. Obama has said he is willing to cut entitlements in exchange for a Republican agreement to increase taxes.

Democrats want to “enact an agreement that ensures America pays its bills and reduces the deficit in a balanced way without putting all of the burden on seniors and the middle class,” Representative Steny Hoyer of Maryland, the second-ranking House Democrat, said in a statement after a 75-minute negotiating session yesterday at the White House.

Don Stewart, spokesman for Senate Minority Leader Mitch McConnellof Kentucky, underscored Republicans’ opposition to any tax increases.

‘It’s Baffling’

“It’s baffling that the president and his party continue to insist on massive tax hikes in the middle of a jobs crisis while refusing to take significant action on spending reductions at a time of record deficits,” Stewart said after the meeting.

U.S. stock futures declined, indicating that the benchmark Standard & Poor’s 500 Index will fall for a second day. Futures on the S&P 500expiring in September fell 0.9 percent to 1,329.3 at 10:59 a.m. inLondon.

Futures on the Dow Jones Industrial Average declined 87 points, or 0.7 percent, to 12,528. The Stoxx Europe 600 Index fell 0.5 percent to a one-week low.

Obama and congressional leaders are seeking a deal to pave the way for a vote in Congress to increase the debt limit, a move the Treasury Department says is needed by Aug. 2 to avert a default on the nation’s financial obligations.

‘Catastrophic Consequences’

Treasury Secretary Tim Geithner said on “Face the Nation” yesterday that the administration wants the most comprehensive deficit-cutting deal possible. He reiterated that failing to raise the debt limit could have “catastrophic” consequences for the economy.

On July 9, House Speaker John Boehner, an Ohio Republican, said following a phone conversation with Obama that, amid the stalemate over taxes, all sides must settle for a smaller plan than the president seeks. Before yesterday’s White House meeting, Obama said “we need to” reach an agreement within the next 10 days.

During the meeting, Obama said he believed a bigger deal might be politically easier, with both sides making philosophically difficult concessions, said a Democrat familiar with the discussions. The president asked Republicans to return today with details of their proposal, including numbers, the person said.

‘Huge Hit’

Christine Lagarde, managing director of the International Monetary Fund, said on ABC’s “This Week” yesterday that the unresolved situation with the debt ceiling could mean higher interest rates, a higher burden on U.S. taxpayers and “stock markets taking a huge hit and real nasty consequences not just for the United States but for the entire global economy.”

Boehner and the president had both been aiming for a larger compromise that would extend the debt ceiling through the next election in 2012. House and Senate Republicans are insisting that spending cuts exceed any increase in the debt ceiling.

Republicans including Majority Leader Eric Cantor of Virginia, a participant in previous bipartisan debt talks led by Vice President Joe Biden, say that group had identified between $2 trillion and $2.5 trillion in spending cuts that could serve as a framework for an agreement between Obama and congressional leaders.

Democrats, including Maryland Representative Chris Van Hollen, who participated in the Biden effort, say Democrats never agreed to that amount without new revenue in the mix.

Doesn’t Get Easier

The conflicting accounts underscore the difficulty of reaching a speedy resolution, said Robert Bixby, executive director of the Arlington, Virginia-based Concord Coalition.

“It’s not a simple matter of going back to what everybody agreed to in the Biden talks because everybody didn’t agree to it,” said Bixby. “It doesn’t get any easier just to get a short-term deal.”

McConnell said yesterday on “Fox News Sunday” that he also favors “the biggest deal possible. We’re just not going to raise taxes in the middle of this horrible situation.”

The Labor Department reported July 8 that the unemployment rate in June unexpectedly climbed to 9.2 percent, the highest this year. Employers added 18,000 jobs, the weakest growth since September 2010. Payroll growth for May also was revised downward, to 25,000.

Senate Majority Leader Harry Reid, a Nevada Democrat, expressed frustration yesterday that Republicans had repeatedly walked away from the table, according to one congressional aide. Cantor left the Biden negotiations in a similar stalemate on taxes.

Dismal jobs report raises doubts about economic recovery

Reporting from Washington— 

With unemployment taking a gut-wrenching turn for the worse, political leaders and economic policymakers are being forced to confront the very real possibility that the tepid recovery has stalled out — and with no easy fix in sight.

U.S. employers added almost no new jobs in June, the government reported Friday. That pushed the nation's jobless rate higher for the third straight month — to 9.2% — and left the number of idled workers at 14 million, almost half of them jobless for six months or more.



The near-paralysis in hiring, only 18,000 net new jobs last month, extended across almost the whole economy, encompassing both the public and the private sectors.

Manufacturing, which many analysts had counted on to help improve the picture, was essentially flat. State, local and federal governments shed thousands of jobs, largely in response to lost tax revenues and budget pressures.

"It's an abysmally weak report. All of the distress indicators are flashing red," said Patrick O'Keefe, economic research director at accounting and advisory firm J.H. Cohn.

The latest report cast more doubts about the underlying strength of the economy and whether models for predicting job growth that were developed in past decades are reliable guides in the new economy.

The pressure on policymakers was intensified by the fact that high levels of unemployment not only inflict pain on the jobless but also impose heavier burdens on working Americans.

While attention is usually focused on the problems of the unemployed and the accompanying rise in the cost of government safety-net programs, the continuing high level of joblessness also means that working Americans must shoulder the full burden of pulling the economy forward.

Instead of helping pull the wagon — by paying taxes and spending wages to help boost consumption — the unemployed are on the sidelines. Government reports show that workers who lost jobs between 2007 and 2009 had median weekly earnings of $602.

"They're not generating goods and services and the incomes which would cause the economy to expand and make all of us better off," O'Keefe said, estimating that the lost output and income from the millions of unemployed amount to trillions of dollars. "For the rest of us, it means we'll work harder and longer, and be less demanding of income and benefits."

Major stock indexes fell sharply on the unemployment report Friday, though they recovered much of the lost ground by the end of the trading day. And economists began ratcheting down projections for the second half of the year from what many had expected would be a relatively healthy uptick in growth.

The lack of hiring in June was all the more dismaying because it flew in the face of most economists' predictions.

In recent days, many had raised their job-growth forecasts into the 100,000 range. Though job creation in May also had been disappointing, that was widely attributed to temporary factors, including a spike in oil prices and manufacturing disruptions stemming from the earthquake and tsunami in Japan.

May was not a blip, however. In fact, the 54,000 new jobs originally reported for that month were revised down to just 25,000 on Friday.

By contrast, from February through April, employers added an average of 215,000 jobs a month. That was a solid, if less than spectacular, improvement from previous months, and had raised hopes that the long-awaited rebound in the job market was taking hold.

The setback came at a time when President Obama and congressional Republicans were locked in a struggle over the federal deficit and intent on cutting federal spending, which in the short term, at least, would probably bleed steam out of the economy and further diminish hiring prospects.

The focus on budget cuts makes it highly unlikely that Washington will approve another round of fiscal-stimulus programs to juice up the economy. Nor does the Federal Reserve have a lot of options to spur lending and growth, already having taken interest rates as low as possible.

Austan Goolsbee, Obama's chief economist, said the near-halt in hiring over the last two months reflects the sharp slowdown in economic growth in the first half of the year.

June also brought more income erosion for many workers. The average weekly work hours, an important indicator of employment activity, declined by 0.1 to 34.3.

And, at a time when high oil, food and healthcare costs are diminishing people's spending power, the average hourly earnings for all private-sector employees dropped by 1 cent last month to $22.99. Over the last 12 months, average hourly earnings have increased by 1.9%, less than the overall rate of inflation.

"It's just an across-the-board retreat," said Heidi Shierholz, an economist at the Economic Policy Institute. "This is really scary."

The recession was officially declared to have ended in June 2009, but though company earnings and stocks have rebounded sharply, the job market has not. As of last month, the nation's total payrolls remained 7 million shy of what they were at the end of 2007, when the recession began.

Many economists say the economy needs to create 125,000 net new jobs a month just to keep pace with the growing population of working-age people.

O'Keefe believes that even more jobs, perhaps as many as 175,000 a month, are needed to hold the unemployment rate steady because many more older workers, their wealth stunted by the recession, have delayed retirement.

The Labor Department's survey of households showed that the so-called participation rate — those who are working or looking for work — fell back to 64.1% of the working-age population. That is the lowest since March 1984 and reflects, in part, the despair among many workers who doubt that they'll be able to gain meaningful employment.

Mali Griffen, 44, of Los Angeles, dropped out of the labor force after two years of fruitless searching. Griffen, who has a master's degree from UCLA in library science, is now taking courses online at Santa Barbara City College, hoping that an associate's degree in health-information technology will yield better results.

The latest employment report could further delay the Federal Reserve in raising interest rates. But even that wouldn't help the housing market or the economy much, said Greg McBride, senior financial analyst at Bankrate.com, a personal finance website.

"Until we see job growth kick into higher gear, there will be lingering uncertainty about the sustainability of the recovery," he said.