Wall Street Journal
January 12, 2012
There's no denying that 2012 has gotten off to a strong start. European equity markets are up around 2% in a week and 14% since the end of November. Bond markets are rallying, with Italian and Spanish yields high but stable at 7% and 5.4%, respectively; even the bank debt market has reopened after six months. The resilience of the U.S. economy is fueling hopes the euro zone will avoid a deep recession. What could possibly go wrong?
The big question in 2012 is whether Greece, Italy and Spain can deliver on promised structural reforms. All three have announced new austerity measures. But that's the easy part. Radical supply-side reforms are needed to reverse decades of lost competitiveness and boost long-term growth. Failure to deliver would not only unnerve markets but would make it harder politically for the European Central Bank and governments to continue to provide support to troubled economies, increasing the risk of a euro breakup.
In Italy, new Prime Minister Mario Monti continues to talk a good game, but there's not yet been much action. He wants to reach agreement on a package of measures including changes to employment rights and market liberalization by the end of January. But business leaders are frustrated he waited two months to take the initiative and worry his technocratic government's political honeymoon won't last. They also worry it lacks the political skills to win big fights with unions, parliamentarians and other vested interests.
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