No one said it would be easy. Since the euro-zone crisis surfaced two years ago, European governments have been under pressure to rein in outsized budget deficits and bring their high public debt levels under control. Initially, smaller countries such as Greece, Portugal and Ireland bore the brunt of market scrutiny and were compelled to undertake draconian cutbacks in government spending. Over the past year, sovereign debt of larger countries including Spain, Italy and France also came under market pressure, and the respective governments adopted austerity programs to assuage the markets.
It was widely expected that these policy measures would result in recession in the euro-zone, and the latest data confirm that ten member countries have experienced two consecutive quarters of negative growth. What is grabbing market attention now, however, are the deteriorating labor market conditions in many of these countries and the political backlash to the austerity programs: Core countries such as France and Holland have changed governments in the past couple of weeks, adding to the list of European governments that have fallen since the Great Recession. Newly-elected French President Hollande, who is committed to the euro-zone, has stated that he will seek to renegotiate a fiscal pact with German Chancellor Merkel to make it more pro-growth. Read the rest of this entry »