Global financial community has its eyes set on the crisis-hit eurozone where the European Central Bank (ECB) will soon present the results of its review and stress test of some 130 banks.
The turbulence in the global financial markets this month has been largely attributed to problems in Europe’s 16-year-old monetary union.
Eurozone share prices are among the worst performers and the bond markets have also been in a jittery.
Many analysts say the weakness of the eurozone’s financial system is particularly regarded as a serious drag on Europe, which for long was a key driver of the global economy.
Some analysts have forecast that the number of failed European banks could hit double digits. This must be seen in the context of reports that the UK and the US have “successfully fixed” their banks.
Eurozone’s poor performance is increasingly becoming a wider concern, with the US and the International Monetary Fund worrying that the bloc that makes up a fifth of the world economy is a drag on global prosperity.
But some European countries including France and Italy have taken steps to reform their economies in bid to avoid “a relapse into recession”.
European Central Bank president Mario Draghi, however, stresses that more needs to be done to save eurozone from a catastrophe.
“We avoided the collapse of the euro with a joint effort. Now our focus should be to act jointly again to avoid a relapse into a recession. Hope is not a strategy,” Draghi told eurozone leaders.
He said a coherent strategy for economic growth had to involve “concrete and credible” structural reforms.
Laying out a four-pronged strategy, Draghi emphasised that monetary policy was only one part of an economic revival plan, with the others being reforms, sound public finances and healing the bloc’s sick banks.
“All euro area countries have shortages in potential growth, including Germany,” points out Jyrki Katainen, the European Commissioner tasked with bringing down near record unemployment and raising investment.
“Germany’s potential growth is currently 1.5%. This is far too low,” he said recently.
Rating agency Standard & Poor’s has warned that the eurozone may be entering another stage of recession as governments, banks and companies struggle to cut their massive debts in a period of weak economic growth.
The agency believes a large overhang of debt is one of the main impediments to a more visible recovery. It says that the origins of the eurozone crisis were not public prodigality and budget deficits, but excessive private sector borrowing from external sources.
Experts believe eurozone needs to stabilise macroeconomic conditions even as monetary and fiscal accommodation opens the way for microeconomic reforms, thereby contributing to sustainable growth and development.
These reforms can include amendments to the tax code, labour market institutions, cutting red tape, introducing competition into “sheltered” sectors, pension reforms and education, among others.
But the reform process is beyond the remit of the ECB or the European Commission. These are responsibilities of national parliaments and require national leadership as well as ownership.
As S&P credit analyst Moritz Kraemer put it: “How governments react to the current volatility and economic slowdown will be important determinants for the eurozone’s future direction.”
