Paul Taylor Paris

The euro zone is in the recovery room now that the danger of a Greek default has been averted for a couple of years, but it is not yet safe from a Japanese-style “lost decade”.

The currency area’s escape route hinges more on the pace of expansion in the US and China, lifting the world economy, than on the policy mix in Europe, which will continue to favour austerity over growth next year.

At best, Ireland and Portugal could emerge slimmed down from their bailout programmes and regain capital market access by the end of the year, demonstrating that adherence to a tough fiscal adjustment plan can work.

But question marks hang over both. And Greece will take a little longer. And another debt write-down.

Gloomy forecasts from the Organisation for Economic Co-operation and Development (OECD) and private economists suggest the 17-nation euro zone may stay in recession all next year, swelling the armies of unemployed and pushing efforts to reduce public deficits and debt mountains off track.

Political risks abound: possible social revolt against austerity policies in Greece, Spain or Portugal; a messy, inconclusive election outcome in Italy; and perhaps labour unrest against more modest structural reforms being mooted in France.

Monday’s EU and International Monetary Fund (IMF) agreement to keep Greece afloat inside the euro zone, by reducing its debt now and hinting at official debt relief to come later, has removed the biggest risk of a financial shock that could re-ignite market panic and send the euro back into the emergency ward.

Market relief over the Greek deal, coupled with European Central Bank promises to do whatever it takes to preserve the euro, helped Italy sell its last 10-year bonds of 2012 on Thursday at the lowest yield for nearly two years.

French Finance Minister Pierre Moscovici called it “a turning point for the euro zone because it helps recreate stability and confidence. Greece’s fate will no longer be a daily issue.”

European internal market commissioner Michel Barnier said the peak of the debt crisis was over and “we are now at the start of the second half”.

Some analysts are less convinced.

Mujtaba Rahman of Eurasia Group said the Greek fix “keeps the show on the road, but is no game changer”.

The campaign for Germany’s general election in September next year means that bolder steps towards writing off debt or sharing liabilities will have to wait until at least the end of next year. Public opposition to a “transfer union” in the euro zone’s biggest economy and main paymaster remains high.

Yet no eurosceptical party has emerged to capitalise on that mood, and the next Berlin government, whether a “grand coalition” of centre-right and centre-left, which seems the most likely, or another permutation, may be more open to such solutions. – Reuters