2014 Should be Brighter for Euro Zone
Knock on wood while saying it, but the euro zone did more than just survive the past year.
At the start of 2013, worry persisted about whether the currency bloc had done enough to prevent a fresh descent into crisis. Now, there are good reasons to believe relative calm may persist for 12 more months.
Europe isn't free of problems. But the channels by which issues in one country could swiftly engulf the wider bloc have been broken. In 2013, various flashpoints—from Italy's elections to Portugal's political strife to Cyprus' bailout—caused little more than localized market ripples.
Economically, 2014 should be brighter. The euro zone might grow 1% in 2014, according to Deutsche Bank, DBK.XE +0.73% after a contraction of 0.4% in 2013. Indicators such as Markit's purchasing managers indexes and the European Commission's economic-sentiment indicator have all continued to rise.
Less-austere 2014 government budgets mean that the drag on the economy should fall to 0.3% of gross domestic product from almost 1%, Berenberg Bank notes. The European Central Bank delivered a rate cut in November; it may well provide further support.
Progress has been made on strengthening Europe's institution. The ECB's intervention proved decisive,And now European politicians have hammered out at least the underpinnings of a banking union. That is an important step forward.
Not that it is all smooth sailing from here. While Ireland has graduated from its bailout, Portugal is likely to require fresh Europeanassistance to regain market access. Greece still needs debt relief. Unemployment stands at 12.1% in the euro area, and is more than 20% in Spain and Greece.
Meantime, France and Italy both need reform to unlock their growth potential. The challenge for French President François Hollande, in particular, is mounting.
Elsewhere, the German Constitutional Court will rule on the ECB's program for "outright monetary transactions," the bond-purchase program that has proved vital in quelling the crisis. And the ECB's stress tests of banks' balance sheets may yet cause jitters.
Given the experience of 2013, though, and the fact that bond-market stresses have been alleviated by the ECB, these risks look manageable. At worst, they are mostly slow-burn problems.
With growth picking up elsewhere, too, the euro zone may finally have some reason to celebrate.