Growth to falter as the fiscal crisis deepens

The European economy has largely shrugged off the ongoing fiscal crisis in the euro-zone periphery and continued to expand at a healthy pace. But while the improvement in the global environment and the weaker euro bode well for exporters, the boost to growth from the sector will fade this year. Meanwhile, there are still major doubts over whether domestic demand in the core euro-zone economies will strengthen markedly as the fiscal squeeze spreads from the periphery and the ECB perhaps grows more hawkish. All this, coupled with the likelihood that the peripheral debt crisis will intensify, will keep fears of a euro-zone break-up alive and push the euro lower.