The first fall in euro zone unemployment in almost three years coupled with rising prices gave fresh momentum to an economic recovery, but a growing rift between the region’s haves and have-nots continued to widen.

The improvement is a welcome sign that the euro zone’s rebound is picking up steam, more than five years after a financial crisis erupted that forced five countries, from Cyprus to Spain, to seek emergency aid from their neighbours.

The jobless rate in October fell to 12.1 per cent, the first fall since February 2011, the European Union’s statistics office Eurostat said today.

That was better than economists had forecast but it belies a wide disparity across the 17 countries using the currency.

"It is a modest, pleasant surprise, but does not change the picture of a very weak labour market," said Jonathan Loynes of Capital Economics. "The latest news on inflation and unemployment won't do much to relieve the pressure on the European Central Bank. to support the fragile recovery and head off a potentially damaging bout of deflation."

While just 5 per cent of Austrians are unemployed, 27 per cent of Greeks and Spaniards are without a job. In total, an unprecedented 19 million people are out of work.

Consumer price inflation - the rate of increases in the cost of shopping and paying household bills - also rose in the euro zone by 0.9 per cent in November, slightly more than economists had predicted.

That puts the annual inflation rate, measured on a basket of goods including cigarettes, beer and gas bills, on an upward path after an unexpected slip in October. While energy prices fell, the rising cost of food drove up the overall index.

The improvement follows an encouraging recovery in optimism, despite shrinking loans to consumers and businesses in the region.

Economic sentiment in the 17 countries using the euro strengthened by 0.8 points to 98.5 in the seventh straight month of gains, according to a European Commission survey yesterday, beating economists' expectations.

The business climate reading turned positive for the first time since March last year.

Wide divergences remain in the economic health of countries in the euro zone. Greece, Cyprus and Ireland suffered deflation in October, while French business confidence fell in November.

The sharp differences between the countries in the euro zone, both in price rises and unemployment, present the European Central Bank with a conundrum.

But its power to remedy this widening rift between prosperous countries such as Germany and struggling states including Portugal is limited.

By cutting the cost of borrowing or giving banks cheap loans, it may inadvertently help those countries who need it least, fuelling price rises in Germany while credit-starved consumers in Ireland stay reluctant to spend.

“It’s a major problem,” said Graham Bishop, an advisor to the European Commission. “We have a single currency but we don’t have a single economy.”

“Unlike in the United States, there is no political will to have permanent financial transfers to weak countries in Europe,” he said. “The differences are just something we’re going to have to live with.”(Reuters)