Analysis: Too slowly, euro zone laggards start to shape up

Thu Apr 5, 2012 4:04pm EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - It may be cold comfort for countries on the euro zone's southern periphery mired in recession, but they are making clear strides by some measures towards putting their economies on a sounder long-term footing.

After years of excessive debt-fueled consumption at home, Spain and Portugal are seeing a big increase in exports, while Italy's budget deficit is now comfortably below Europe's mandated ceiling of 3 percent of national output.

All three countries have embarked on far-reaching reforms to labor and product markets that, while falling short of purists' hopes, should over time considerably improve the supply-side performance of their economies.

In short, the wrenching policy corrections set in train by the euro zone's debt and banking crisis are gradually happening.

From the perspective of financial markets, though, the progress is too little too late. With investors skeptical of governments' commitment to protracted austerity and reform, bond yields in periphery countries, especially Spain, are once again rising as fast as their unemployment rates.

"The adjustment is progressing, but the starting position is very difficult and that still leaves them with a long road ahead. They're going to have a hard time in the coming one to two years," said Greg Fuzesi, an economist at JP Morgan in London.


Take Spain. Despite a big bill for imported energy, its trade balance has turned positive. The country still has a current account deficit, because of debt service payments, but the shortfall narrowed in the fourth quarter of 2011 to a seasonally adjusted 6.0 billion euros, or 2.2 percent of gross domestic product.   Continued...

Members of the media talk next to a computer screen at Madrid's bourse April 5, 2012. REUTERS/Susana Vera