Gold Magazine January - February 2014, Issue 34 | Page 68

eurozone

Eurozone
Showed its
Resilience
in 2013
{money}

A

n end-of-year article
by Simon Nixon
in The Wall Street
Journal suggests that
for the eurozone, the
real story of 2013 was
been what didn’t happen rather than what did. “Confronted by a
series of shocks that in previous years might
have reignited concerns over the survival of
the currency bloc, the euro has proved remarkably resilient,” he author notes.
He goes on: “The decision to force uninsured depositors in the two biggest banks
in Cyprus to take losses didn’t lead to bank
runs across the periphery as many had
feared. Unemployment remained painfully
high in much of Southern Europe, yet there
was little evidence of the social unrest that
the doomsayers had predicted. There were
political crises in Italy, Greece and Portugal.
But on each occasion, the outcome was a
stable government committed to reforms
designed to make the economy more productive and competitive.
“Instead, as fear of an implosion receded,
the economy recovered. The gross domestic
product of the euro area is likely to have expanded by 0.5% in the second half of 2013;
Portugal came out of recession in the second
quarter, Spain in the third quarter; Italy
stopped contracting in the fourth quarter
and Greece is expected to return to growth
in 2014 for the first time in seven years; Ireland defied most forecasts by growing 1.5%
in the third quarter alone.

“Spain, Portugal and Greece eliminated
vast current-account deficits, reducing their
reliance on foreign borrowing – and not
just by slashing imports; Iberian exports in
particular have surged, aided by structural
reforms that have boosted competitiveness.
Budget deficits have been cut: Greece’s 19%
fiscal adjustment is a remarkable achievement that should allow the country to deliver a primary surplus before interest costs
in 2013.
“Against this more benign economic backdrop, bond yields have fallen back to 2010
levels as foreign investors have returned to
crisis-country debt markets. Ireland was
able to exit its bailout program and Portugal
hopes to do so next year. The European
Central Bank’s balance sheet, which ballooned during the crisis as funding markets
closed, has shrunk as banks have been able
to repay emergency loans; financial fragmentation across the euro zone has eased as
borrowing costs in the periphery have finally
started to come down.”
The Wall Street Journal notes that two of
the eurozone’s largest economies – France
and Italy – have made the least progress in
terms of improving their competitiveness
and productivity through the crisis, reflected
in very weak growth outlooks. It is an open
question, writes Simon Nixon, whether Paris
or Rome has the will to undertake essential
reforms or face down the inevitable resistance from vested interests.
But while these risks are real, he says, one
shouldn’t rule out the possibility of upside

68 Gold the international investment, finance & professional services magazine of cyprus

The decision to force
uninsured depositors in
the two biggest banks
in Cyprus to take losses
didn’t lead to bank runs
across the periphery as
many had feared

surprises too. After all, eurozone stock markets soared in 2013, which suggests that real
money investors at least are anticipating a
substantial recovery in corporate earnings
over the next two years at odds with the
gloomier macro forecasts.
“What would transform the economic
outlook – and help ease deflation fears –
would be an upturn in business investment
and German domestic demand. On both
counts, there are reasons for optimism. Corporate investment has been exceptionally
weak for five years, suggesting clear potential
for a powerful snap back as confidence returns. At the same time, there are signs that
ultra-low borrowing costs are finally tempting Germans to start spending: German
dom