Despite Greece, euro zone is turning the corner

Sun Mar 1, 2015 5:09am EST
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By Paul Taylor

LONDON (Reuters) - The latest episode of Greece's debt crisis has revived doubts about the long-term survival of the euro, nowhere more so than in London, Europe's main financial center and a hotbed of Euroskepticism.

The heightened risk of a Greek default and/or exit comes just as there are signs that the euro zone is turning the corner after seven years of financial and economic crisis and that its perilous internal imbalances may be starting to diminish.

To skeptics, the election of a radical leftist-led government in Athens committed to tearing up Greece's bailout looks like the start of an unraveling of the 19-nation currency area, with southern countries rebelling against austerity while EU paymaster Germany rebels against further aid.

A last-ditch deal to extend Greece's bailout for four months after much kicking and screaming between Athens and Berlin did little to ease fears that the euro zone's weakest link may end up defaulting on its official European creditors.

U.S. economist Milton Friedman's aphorism - "What is unsustainable will not be sustained" - is cited frequently by those who believe market forces will eventually overwhelm the political will that holds the euro together.

Countries that share a single currency cannot devalue when their economies lose competitiveness, as occurred in southern Europe in the first decade of the euro's existence. There is no mechanism for large fiscal transfers between member states.

So the only option has been a wrenching "internal devaluation" by countries on the periphery of the euro area, involving real wage, pension and public spending cuts and mass unemployment that has caused deep social distress.

Austerity has fueled radical forces of political protest and may be running out of democratic road - not just in Greece - but none of the alternative ways out of the euro zone's economic divergence dilemma looks remotely plausible.   Continued...

A Greek (L) and a European flag flutter outside the Greek embassy in Brussels February 19, 2015.  REUTERS/Yves Herman