European Central Bank’s Leader Sees Progress in Tough Times for Euro Zone

The following is an excerpt from an article in:


The New York Times
Wednesday, October 10, 2012

European Central Bank’s Leader Sees Progress in Tough Times for Euro Zone

By JACK EWING

FRANKFURT — The president of the European Central Bank on Tuesday joined a small but growing number of economists who argue that, even though the euro zone still faces huge economic problems, there are tentative signs that two years of painful adjustment are beginning to pay off.

Several countries, including Italy, Portugal and even Greece, have been able to increase exports. Labor costs have fallen in some of the troubled countries, which should further improve their ability to sell their goods on the global market. And in another positive signal, the flight of money from Spain was reversed in September for the first time since mid-2011.

“One should acknowledge the extraordinary challenges,” Mario Draghi, the central bank’s president, told a committee of the European Parliament in Brussels on Tuesday. But, he added, “one should acknowledge the extraordinary progress both in data and economic reform.”

For the moment, any glimmers of improvement are overshadowed by deep recession in southern Europe and staggering levels of unemployment. The risk of a euro zone breakup remains. It will be months if not years before citizens of countries like Greece and Spain perceive an improvement in their standards of living.

Mr. Draghi noted that economic changes had “not yet had a fully visible impact on the everyday life of citizens in the countries suffering most from the crisis.”

If the euro zone crisis ends someday, though, it will be because countries are able to escape the vicious circle created by recession, debt and austerity. Economic growth would lead to higher tax receipts. Governments would then have a better chance of repaying their debts and would face less pressure to cut spending.

That day may still be a long way off. But some economists have begun challenging the economic orthodoxy, which held that the troubled euro zone countries were effectively doomed. Deprived of national currencies they could devalue, according to the conventional wisdom, the countries would never become competitive without inflicting so much pain on their citizens that there would be revolution in the streets.

Workers have suffered plenty, of course, and protests in Madrid and other cities illustrate the depth of public frustration. In Athens on Tuesday, police officers fired tear gas and stun grenades at protesters during a visit by Angela Merkel, the German chancellor, whom many Greeks blame for the austerity budgets that have caused a drastic decline in living standards.

Recent data, though, shows that labor costs have already fallen substantially enough in Ireland, Spain and Portugal — though not Italy — to make it more feasible for them to compete on price with more efficient countries like Germany.

For more, visit www.nytimes.com.