Some observations from the Wall Street Journal that run counter to the consensus view on Europe.

For the euro zone, the real story of 2013 has 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.

  • The forcing of 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 predicted
  • There were political crises in Italy, Greece and Portugal, but each time 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
  • 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 should allow the country to deliver a primary surplus before interest costs in 2013
  • 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
  • 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

“All relevant economic and financial indicators indeed suggest the systemic crisis is over,” declared Holger Schmieding, chief economist of Berenberg Bank in a research note last week.
True, not everyone is ready to go so far, but most forecasters expect the euro zone to continue to muddle through in 2014, albeit with lackluster growth in the region of 1%. The European Commission predicts growth next year of 1.1%.

Big risks remain:

  • government debt levels remain precariously high, leaving economies vulnerable to external shocks
  • Some economists fear the euro zone is at risk of “turning Japanese” and argue that much looser monetary policy is needed in the form of the ECB engaging in some money-printing of its own to prevent a slide into outright deflation
  • two of the euro zone’s largest economies—France and Italy—have made the least progress in terms of improving their competitiveness and productivity

Euro Zone Rode the Shock Waves in 2013Euro (The Wall Street Journal is often gated, so if you’re unable to access the article try a search of Google news using the headline)

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Challenging words. To be just dismissed, or food for thought?