Europe urged to continue with reforms

European member states are urged to continue to make progress in rebalancing their economies to regain investor confidence, said Standard & Poor's Ratings Services in a report.

In the rating company's view, this is a challenging but achievable agenda, although implementation risks loom large. These risks are the main reason that the majority of our outlooks on our eurozone sovereign ratings are still negative. Nevertheless, European leaders have laid, or at least announced, much of the groundwork for the eurozone to emerge from its lingering crisis.

In its report "The Eurozone Debt Crisis: 2013 Could Be A Watershed Year", the rating agency said this could be a decisive year in determining whether the eurozone ( European Economic and Monetary Union) can emerge from its sovereign debt troubles.

"Nevertheless, we believe that investor confidence will only return if member states continue to make progress in rebalancing their economies, both through structurally stabilizing public debt and by further reducing external deficits," said Standard & Poor’s credit analyst Moritz Kraemer. "Achieving this will take a disciplined and transparent response from policymakers both at national and European levels. Safeguards to the social contract may also be necessary to assist in the cohesion of those member states suffering from high unemployment, excessive private leverage, and stagnating or falling living standards."

The eurozone’s success in reversing its credit trends will depend on national and pan-European policymakers’ responses to the eurozone’s continuing economic, political, and social risks, the report says.

S&P noted that 2013 could mark the start of the region sustainably overcoming the market volatility and fragmentation that has affected it over the past few years. It could also see the return of some so-called "programme countries" - member states that have borrowed from the European Stability Mechanism or the European Financial Stability Facility multilateral loan programmes - such as Ireland and Portugal, to more substantial primary issuance in the capital markets.

It said economic rebalancing has still some way to go and will seriously challenge political leaders. "We are also of the view that the economic and social costs of economic rebalancing could be more easily contained if a higher degree of policy coordination were to lead to a more symmetrical adjustment shared between the eurozone’s core external surplus and peripheral deficit countries, rather than with most of the burden falling on the latter."

While there have been noteworthy new policy developments, such as Outright Monetary Transactions and the ESM, none of these tools have yet been used and implementation risks remain, the report says. Another key risk, in our view, would be the sense of complacency that could develop along with an improvement in market conditions. Complacency could lead to the fragile agreements among European policymakers unraveling if some consider that the eurozone’s troubles have passed and previously agreed actions can be shelved or watered down.

"We consider that it is too early to firmly state that complacency risk has materialized. We are of the view, however, that the consensus among European policymakers may be more brittle than generally appreciated," said Mr. Kraemer.

With the key of successful crisis resolution in the hands of governments, the electoral calendar remains a vital factor in assessing the future course of policies as well as progress in crisis resolution. The main elections in 2012, in Greece, France, and The Netherlands, resulted in governments that took an overall constructive view on crisis resolution efforts. It is our base case that the elections we consider the most important in 2013--Italy in February, Germany and Austria in the autumn--will similarly lead to a continuation of the current policy path.