Analysis: Euro zone making scant headway on growth and reform

Fri Sep 14, 2012 8:51am EDT
 
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - The euro zone is finally getting a move on and slinging a safety net under the single currency. If only it were making as much headway in correcting the economic imbalances that made a rescue plan necessary in the first place.

The European Central Bank has bought time for the euro with a scheme for secondary-market purchases of bonds of countries such as Spain if they are shunned by investors. And the European Stability Mechanism is set to buy the debt as it is auctioned, after Germany's top court approved the establishment of the permanent rescue fund. Immediate market pressure has subsided.

Yet European finance ministers meeting in Cyprus on Friday should be worried. Economic trends remain dispiriting: euro zone output is contracting, forecasts for 2013 are being downgraded and the myriad reforms needed to boost longer-term productivity and competitiveness are for the most part conspicuously absent.

"Implementing structural reforms to make an economy more competitive is more difficult when you're in recession, there's a credit crunch and confidence is going down the drain," said Riccardo Barbieri, chief European economist at Mizuho in London.

This week alone, Portugal abandoned hope that 2013 would be a year of recovery -- it now expects the economy to shrink 1 percent after a 3 percent drop this year -- and two leading German research institutes slashed their growth projections for Europe's biggest economy.

Even if things look up in the second half of next year, the level of output at the end of 2014 will still be lower than it was when the downturn started in the first quarter of 2008, according to economists at Jefferies.

That's seven lost years.

The euro zone is making undisputed progress in unwinding the trade imbalances that built up between northern creditors and southern debtors during the go-go years of easy, cheap credit.   Continued...

 
A Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt September 6, 2012. REUTERS/Alex Domanski