Analysis: Long-term battle for euro hinges on growth reforms

Mon Oct 29, 2012 10:12am EDT
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By Alan Wheatley, Global Economics Correspondent

BRUSSELS (Reuters) - Europe has won the immediate battle to save the euro, but the war to make the single currency sustainable in the long run has only just begun.

Relief in Brussels is palpable: the European Central Bank's conditional promise to act as buyer of last resort for the bonds of troubled euro zone members has removed an existential threat, at least for the time being.

And crucially, some northern countries that had previously paid only lip service to the impossibility of a euro break-up now mean what they say, according to officials.

As a result, the 17 countries sharing the single currency have gone into overdrive to build the supporting institutions that should have been in place soon after the euro was launched in 1999.

The euro zone now has a permanent rescue fund. An embryonic banking union to break the death clinch between highly indebted sovereigns and banks is being formed. There is even talk of a separate budget for the euro zone to cushion economic blows.

"There's lots of progress that you couldn't have imagined politically two years. Things are moving fast," said Diego Valiante, a researcher with the Center for European Policy Studies, a think tank in Brussels.

Yet the new architecture may take a decade to complete and even then, the institutional pillars will not ensure the euro's long-term viability.

For that, growth and convergence are needed -- the reverse of the divergent north-south economic, fiscal and financial trends still balkanizing the euro zone and preventing the ECB from delivering a single monetary policy for the entire area.   Continued...

A structure of the Euro currency sign is seen through the window on a rainy evening in Frankfurt July 13, 2012. REUTERS/Alex Domanski