Euro zone recovery taking lasting hold: EU study

BRUSSELS (BestGrowthStock) – The euro zone’s economic recovery seems to be taking hold and is broadening, but growth will slow as governments cut spending to ward off the debt crisis, the European Commission said on Tuesday.

In its quarterly report on the euro zone, the European Union’s executive said expansion was marred by divergences among the currency area’s 16 countries and hampered by investors’ distrust of some of those countries’ policies.

“The robust expansion of output this year should be taken as a clear sign of the recovery taking a lasting hold,” the Commission said.

“Signs of a softening global environment and the onset of fiscal consolidation entail that activity is likely to moderate toward the end of 2010 and in 2011, but to pick up again in 2012 on the back of strengthening private demand.”

But the currency area’s debt problems, triggered by fiscal problems in its fringe countries, such as Greece and Ireland, show the need for continued fiscal consolidation.

The strength of the sovereign debt crisis that shook the euro area this year underlined that fiscal consolidation needs to remain a top priority,” the Commission said. It defended the euro zone’s response to the sovereign debt problems, which some analysts say has been inadequate.

“Amongst the major achievements this year I would count the financial support programs for Greece and Ireland, the creation of … the Financial Stability Facility (EFSF), as well as the decisive extension of the ECB’s lending operations,” said Marco Buti, chief of the Commission’s economic department.

The euro zone’s crisis-hit countries will continue to suffer further painful adjustment.

“Prices in some countries have yet to follow the reduction in domestic demand so that their price competitiveness materially improve,” the report said.

It added new financial regulation being worked out in the EU would help prevent asset bubbles in the 27-country bloc, such as the property boom and bust that has hit countries such as Ireland and Spain hardest.

(Reporting by Marcin Grajewski)

Euro zone recovery taking lasting hold: EU study