IRELAND’S TREE OF the Year (yes, it’s a real thing) was today announced as old tree, which is on the Rock Close on the grounds of Blarney Castle Estate, …
What is the current state (August 2013) of the Eurozone Debt Crisis?
Not out of the woods yet, but there is light dappling through the trees. The game changer was the European Central Bank’s move of a year ago, when they announced that they stand ready to buy government bonds of countries under pressure. Those who thought the ECB was not a “true” central bank were proved wrong, and risk spreads on the sovereign bonds of high-debt countries have been much lower since.
Recently we have seen some good news from the growth front as well: GDP growth in Q2 returned into positive territory for the Eurozone as a whole, with stronger than expected results in Germany, France, and even Portugal. Spain and Italy are still in recession, but even there the worst of the downturn seems to be over.
However, the last twelve months have also confirmed that without the spur of nervous financial markets, reform efforts lose momentum. At the Eurozone-wide level, we have seen limited progress on banking and fiscal union. I hope efforts will accelerate after the upcoming German elections, but the last year has been disappointing. At the national level the picture is very mixed: countries like Ireland and Spain have made significant progress in some reform areas, and have regained competitiveness. Italy on the contrary has made little progress on structural reforms, in my opinion, and its competitiveness (measured by unit labor costs) has deteriorated even further. France has shown a similar reluctance to undertake reforms that could make the economy more flexible. Meanwhile, the European banking system remains challenged by more demanding capital requirements, and may not be able to provide enough lending to feed an acceleration in growth.
Bottomline: I think the risk that the Eurozone might break up has been taken off the table, and I do not think it will come back. The ECB and governments have shown that they are fully committed to keeping the area together. But there is a lot more work to be done to improve the flexibility and competitiveness of many European economies—otherwise both growth and employment will remain disappointingly weak in a number of countries (and this in turn will make it harder to reduce debt levels further).