By Nick Mann | 21 August 2012
The correction of economic imbalances in the eurozone countries worst hit by the economic crisis is at best only halfway complete and could take several years to correct, Moody’s said last night.
In a report on progress made by the ‘periphery’ countries – Greece, Ireland, Portugal and Spain – the ratings agency said all eurozone countries had made adjustments, ‘in some cases to a significant degree’.
The periphery countries had reduced their trade imbalances by reducing imports and, more recently, increasing exports as a result of gains in competitiveness.
But Moody’s said these competitiveness gains seemed to have come about as a result of increased productivity, which relied on the size of the workforce falling faster than output.
‘The fundamental question is whether those competitiveness gains in the periphery are sufficiently sustainable to enable the adjustment to be completed: this can only be delivered by structural reform.’
All four countries are expected to undertake wide-ranging structural reforms as part of the conditions of their bailout programmes, with changes such as opening up sectors of the economy to competition and increased regulation of the banking sector.
The Irish and Portuguese reform programmes have had a ‘significant degree’ of success, Moody’s said, with ‘many difficult reforms having being introduced over a short period of time’.
However, in Greece delays in many areas meant reforms that weren’t fulfilled in its first adjustment programme were ‘rolled over’ into the second programme agreed earlier this year.
While Spain’s formal adjustment programme has not yet started, Moody’s noted that it had already introduced important changes in the fiscal relationship between its central government and the regions as well as important labour market reforms.
Moody’s said: ‘A comparison with the crises faced by Sweden and Finland in the 1990s shows that the complete unwinding of the periphery countries’ accumulated imbalances – which were due to the dis-saving behaviour in their respective domestic private sectors rather than their governments – may still take several years.’
Specifically, it said that if Finland’s experience was a benchmark, some countries might not return to pre-crisis GDP levels until 2016.
