Euro zone sees light at end of tunnel, pitfalls remain

Fri Apr 26, 2013 8:16am EDT
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By John O'Donnell

BRUSSELS (Reuters) - There are no calls for celebration, no desire to relax in the corridors of Brussels but some officials believe the euro zone has turned a corner, sharpening the focus on longer-term reforms and structures.

Despite a messy bailout of Cyprus, markets are calm, Ireland's rescue program is on track and Greece and Portugal, while still in recession, hope for a slow recovery next year.

Slovenia's banks are a concern, but one that policymakers are confident they can deal with. And although Malta's banking system is vast compared with its economy, it is not structured in the same way as in Cyprus. The same goes for Luxembourg.

Spain's bank restructuring appears to be working.

"All the skeletons are out of the closet," said one senior official who has spent much of the past three years working on the crisis. "There are no more major issues in the pipeline."

It is a line of thinking shared by European Central Bank policymaker Yves Mersch, who said on Wednesday he did not expect another country to "slump further".

The relative calm has given officials in Brussels breathing space, and the signs are that several countries, including France and Spain, could be given an extra year or two to meet their budget deficit goals. The policy of austerity remains, but the pace of fiscal consolidation will ease.

Yet none of that means the bigger issues underpinning the crisis are resolved. While the existential threat may have passed, the need to implement tough and unpopular structural reforms remains, and plans for tighter oversight and control of banks via a 'banking union' are not even half-way there.   Continued...

The Euro sculpture is partially reflected in a puddle on a cobblestone pavement in front of the headquarters of the European Central Bank (ECB) in Frankfurt January 21, 2012. REUTERS/Kai Pfaffenbach