Fiscal crisis casts an ever longer shadow (Q2 2010)

The European economy has shown further signs of recovery in response to the continued improvement in global economic and trade conditions. But the fiscal crisis in the euro-zone’s peripheral economies is casting an ever darker shadow over the medium-term outlook for the region. Rescue packages for Greece, and perhaps others, may prevent sovereign debt defaults and hence keep the currency union intact in the foreseeable future. Meanwhile, the drop in the exchange rate is something of a silver lining for the core economies’ exporters. Nonetheless, with the peripheral economies likely to remain deep in recession, and the core economies set to embark on their own fiscal consolidations from next year, the recovery will remain fragile at best. Against that background, concerns about the future of the euro-zone will continue to weigh on the euro.