The Euro Zone Is ‘Shaping Up Quite Well’: Think Tank

The euro zone may be in recession, but the region’s efforts to repair budgets, cut labor costs, and improve competitiveness is signaling a more dynamic future for its economy, according to a report commissioned by European think tank The Lisbon Council and Germany-based Berenberg Bank.

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"If the euro zone 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," Holger Schmieding, chief economist at Berenberg Bank and author of the “2012 Euro Plus Monitor,” said on Monday.

In the absence of major policy mistakes, the euro crisis could gradually fade in 2013, the report noted, as long as the region avoids overdosing on austerity like Greece. Rather, policy focus should shift urgently to pro-growth structural reforms.

Not everyone is convinced, however.

Giada Gianni, European economist at Citigroup, told CNBC that while Europe had made some progress in its public sector finances since 2009, the impact of major restructuring and reform has yet to be seen.

“Bits and pieces have been put in place, but we still haven’t seen the impact of reforms on budgets as yet,” Gianni told CNBC. “Definitely, the public sector finances have improved compared to 2009 or even 2010, and current account balances have shrunk significantly … but this is also because countries are importing less and consuming less,” she said.

After analyzing economic reforms taking place throughout the euro zone, the report by Brussels-based Lisbon Council and Berenberg concluded that the economic crisis that had forced countries such as Greece, Ireland, Spain, and Portugal to address flaws within their fiscal systems and as a result all four countries had strengthened “their adjustment efforts over the last 12 months.”

Using four criteria to review how the euro zone’s economies were responding to the economic crisis, the report gauged key aspects of adjustment such as change in the fiscal position, external economic accounts, unit labor costs, and supply-side reforms as a basis for analysis and the results were aggregated to indicate the speed of progress made in each European country.

“Almost all countries in need of adjustment ... are slashing their underlying fiscal deficits and improving their external competitiveness at an impressive speed,” Schmieding said, adding that “the euro zone is turning into a much more balanced and potentially more dynamic economy.”

“In other words” he added, “under the pressure of crisis, the countries that need to shape up fast are doing so” and that financial aid for countries such as Greece hadn’t led to a general malaise in enacting reforms. “The results reveal no trace of a ‘moral hazard,’ that is of a hypothetical risk that outside support could blunt the readiness to adjust,” Schmieding stated.

According to Gianni, the main problem remained the region’s debt legacy, including bank debt in countries such as Spain and Ireland, and public debt in countries such as Greece.

“The debt levels in these countries are still too high to make these economies financially sustainable,” she said.  CNBC