The hot phase of euro crisis may be over. But the zone will limp on for years with low growth and high unemployment unless further action is taken on three fronts: bank balance sheets must be cleaned up, monetary policy loosened and more free-market reforms adopted.
The latest news from the euro zone’s various battlefronts is fairly encouraging. GDP in all the problem countries, with the exception of tiny Cyprus, is expected to grow next year. Budget deficits, one symptom of the crisis, are being cut. Current account deficits, the other main symptom, are coming into balance.
Ireland, the poster child of the harsh recipe of fiscal austerity plus structural reform, has just exited its bailout programme. Portugal may do so next year. Even Greece is toying with the idea of issuing government bonds towards the end of 2014.
Among the bigger economies, Spain is on the mend. The outlook is murkier in Italy. But even there, the election of the youthful Matteo Renzi as leader of the centre-left Democrats gives some ground for hope that he will work with Enrico Letta, the prime minister, to reform the country.
Letta is moving smartly to reform the political system and constitution – last week finally abolishing government funding for political parties. What’s less clear is whether he will be able to reform the economy or cut public debt, which will end this year at an eye-popping 133 percent of GDP.