22 January 2013

Reuters: No respite for eurozone in long rebalancing slog

This Reuters analysis says that the eurozone crisis is entering a new, treacherous phase for governments, which can only cross their fingers that slow-burn reforms will pay off before voters get fed up with austerity and high unemployment.

Financial conditions have improved enormously since the European Central Bank promised to do whatever it takes to preserve the euro. Yields on the bonds of highly indebted peripheral countries have fallen sharply, bank funding strains have eased and stock markets have rallied. Countries on the southern rim of the eurozone have made big strides in reducing their budget and trade deficits. They are no longer living way beyond their means. They have also introduced politically touchy structural reforms, notably to make their labour markets more flexible. But demand is likely to remain weak, while unemployment, already at a record 11.8 per cent, is forecast to rise further before it comes down.

Italy, Spain, Portugal, Ireland and Greece shrank their combined current account deficit to an estimated 1.5 per cent of GDP in 2012 from 7 per cent in 2008 and look set to balance their external accounts this year. The reduction in relative wage costs needed to bring about ‘internal devaluation' - the only devaluation available in the absence of exchange rate flexibility - has so far been engineered disproportionately through a rise in unemployment rather than wage moderation.

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