BRUSSELS (MNI) – The position of the Eurozone’s banking sector has
improved but is still hampered by a lack of liquidity and difficulties
in obtaining wholesale funding, the European Commission said in its
quarterly report published on Tuesday.

“Some improvements have…been visible in the euro area banking
sector, where July’s stress tests have helped to assuage balance sheet
concerns,” the report said.

“However, problems related to a lack of liquidity and difficulties
in tapping wholesale funding have not disappeared altogether,” it added.

The European Commission said that the developments in the Eurozone
economy have been “generally positive.”

“Looking further ahead, however, risks remain elevated, and the
recovery can be expected to be fairly uneven and relatively moderate,”
it said.

“One important aspect of the short-term outlook is the likely
unevenness of the upswing to come,” the Commission noted.

“At the heart of this divergence of growth lie the accumulated
macroeconomic imbalances in some member states,” it continued. “The
rebalancing process will take time and be associated with a period of
divergence in growth within the euro area.”

The Commission said that more work is needed on rebalancing prices
and competitiveness levels within the Eurozone to aid current account
adjustment in the 16-nation currency bloc.

“So far, there have been only a few signs of rebalancing of prices
and competitiveness across the euro area and further efforts are clearly
needed here,” the report said.

It asserted that correcting current account deficits “generally
entails a period of sluggish growth and rising unemployment” but that
this could be mitigated if prices and wages were adjusted and
competitiveness improved.

“For the member states facing large current account adjustments,
these findings underscore the urgent need for wage moderation and gains
in competitiveness and, more generally, for reforms aimed at increasing
the flexibility of the economy,” the report said.

On Greece, the report noted that “important steps forward have
already been made with the structural reform agenda.”

“To curb its external deficit, Greece will have to boost its export
sector,” it said.

And it said that “encouraging signs for a rebalancing of supply
towards the export sector exist,” because a high proportion of companies
are involved in export activity.

“This suggests that the important competitiveness-boosting reforms
foreseen in Greece’s economic adjustment programme are likely to pay off
all the more quickly,” the report said.

The report said that corporate balance sheet adjustment might
hamper the recovery because it could result in lower investment rates
and labour compensation.

“It is therefore crucial to counteract these dampening forces on
growth by frontloading growth-enhancing reforms,” it concluded.

In a separate section, the report said that real house prices in
the Eurozone “have decreased significantly since the beginning of the
global economic and financial crisis” and are closer to their
“equilibrium values” than in the US or in the UK.

“This comparatively healthier position of the housing market in the
euro area as a whole is good news for a future recovery in housing
investment and private consumption,” the report said.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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