Bailed out countries ‘are shaping up’

The eurozone is turning into a more balanced and potentially more dynamic economy thanks to market pressure and the constant demand for structural reforms, a study has found.

The sovereign debt crisis has forced Greece, Ireland, Portugal, Spain and Italy to embark on ambitious economic reforms to win back market confidence.

These reforms, while painful at times, have cut labour costs and brought about an “internal devaluation” that has sharpened competitiveness.

The annual report, prepared by the Brussels-based Lisbon Council think-tank and Berenberg bank, said Greece was now the leader in economic reforms towards healthy economic fundamentals, followed by Ireland, Estonia, Spain and Portugal.

“Almost all countries in need of adjustment… are slashing their underlying fiscal deficits and improving their external competitiveness at an impressive speed,” the report said.

Greece, Ireland, Portugal and Spain all sought eurozone loans to help them cope with the effects of the sovereign debt crisis.

“All of the four eurozone countries that have been granted external assistance have strengthened their adjustment efforts over the last 12 months.

“In other words, under the pressure of crisis, the countries that need to shape up fast are doing so. The results reveal no trace of a ‘moral hazard’, that is of a hypothetical risk that outside support could blunt the readiness to adjust,” it said.

The report, called the 2012 Euro Plus Monitor, showed that external imbalances, which were one of the reasons for the debt crisis, were diminishing.

It said real unit labour costs were falling sharply in Greece, Ireland, Portugal and Spain. On the other hand, wage moderation, seen as holding up internal German demand, has ended — suggesting that the private sector in the eurozone’s southern half was moving to catch up with Germany in terms of competitiveness.

“More than anything else, this shows that serious structural adjustments can happen — and are happening — within the confines of the monetary union,” the report said.

It said that while the euro and its governance structure still needed to be improved further, they were already providing an important framework in which countries can successfully reform themselves. “If the eurozone gets through the current acute crisis and stays on the reform path, it could eventually emerge from the crisis as the most dynamic of the major western economies.”