Analysis: Out of intensive care, Europe risks chronic illness

Mon Mar 5, 2012 8:44am EST
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By Paul Taylor

BRUSSELS (Reuters) - The euro zone is out of the emergency ward, but it may face a chronic debilitating illness rather than a rapid convalescence.

The challenges confronting Europe now are to avoid complacency, rekindle economic growth while cutting debt and prevent national politics pulling the currency area apart.

Last week's European Union summit was the first in two years that was not totally dominated by fire-fighting in the currency bloc's sovereign debt crisis. The relief was audible.

"This was not - and that is an innovation - a meeting focused on crisis management," European Commission President Jose Manuel Barroso said. "It was a meeting focused on growth."

Three events have changed the mood and calmed financial markets that appeared late last year to be betting on a breakup of Europe's 13-year-old single currency.

European leaders have signed a German-driven fiscal compact treaty giving sharper teeth to their oft disregarded budget discipline rules, and key states such as Italy and Spain are implementing tough spending cuts and pension and labor reforms.

Greece has averted a catastrophic default, at least for now, securing a second international bailout and a deal with private creditors to reduce its debt mountain to more manageable levels.

Above all, two massive injections of cheap, long-term funds by the European Central Bank have prevented an incipient credit crunch that could have triggered bank collapses, bank runs or a bond market inferno forcing Italy or Spain to the wall.   Continued...

(L-R) Austria's Chancellor Werner Faymann, Portugal's Prime Minister Pedro Passos Coelho  and European Commission President Jose Manuel Barroso attend a European Union leaders summit in Brussels March 2, 2012 .          REUTERS/Francois Lenoir