The European economy has shown tentative signs of improvement in recent months, with activity indicators in both Germany and some of the peripheral euro-zone countries regaining a firmer tone after weakening earlier in the year. But the recovery is built on fragile foundations. There are still few signs that the deep-seated economic imbalances within the currency union have been addressed. And notwithstanding the shift in policy emphasis towards growth, many countries still face many more years of painful fiscal austerity. Finally, the market response to the prospect of policy changes in the US, coupled with the effects of further political uncertainties in Portugal and elsewhere, could test the ECB’s determination to do whatever it takes to the preserve the euro.
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