For linguistic democracy

Taking Europe’s pulse

WORRIES about political troubles in Italy and Spain upset European financial markets in early February, but this followed a long rally since Mario Draghi, president of the European Central Bank (ECB), pledged in July 2012 to do “whatever it takes” to save the single currency. Sovereign debt yields in the troubled economies on the southern and western periphery of the 17-country euro zone have fallen sharply since then, even though the ECB has not had to follow through on its (conditional) commitment to buy without limit short-term government bonds of countries that apply for and get help from the euro area’s main rescue fund. The rally has extended across the spectrum, with a big bounceback in equities.

Despite this return in financial confidence, Europe’s real economy remains sick. Forecasts from the IMF in January show eurowide GDP shrinking by 0.2% in 2013, following a contraction of 0.4% in 2012. The economic reverse is much deeper on the periphery of the single-currency club than in its core. The disparity between core and periphery is particularly stark in labour markets. Unemployment in Germany was just 5.4% of the workforce by February 2013, whereas in Greece and Spain it was over 26%.

Even so there has also been more rebalancing in the periphery than is generally appreciated. Current-account deficits which had ballooned in the first decade of the euro have narrowed in countries like Portugal and Spain. Ireland’s has returned to surplus. Primary budget balances (ie, before interest)—a crucial measure in determining the sustainability of public finances—have improved, with deficits shrinking and Italy’s returning to surplus.

Despite these improvements, government debt levels are now worryingly high in the periphery, with debt burdens (ie, as a share of GDP) above 100% in Greece, Italy, Ireland and Portugal. Greece’s remains exceptionally high, at 178% of GDP, despite a bond buyback late last year and the writedown of over half of privately held debt in March 2012. But other European governments, to whom Greece now owes over half of its debt, have eased the effective burden by lowering interest rates and extending the maturities of their loans.

From: … nomy-guide 30/04/2013

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