Progress has been slow and patchy. Doubts prevail about the ability of a number of peripheral countries to rebalance their economies, making investors nervous about the future of the euro. Yet one country, almost unnoticed, has made significant headway in the painful process of economic change.
In the wake of 2008's financial crisis, Ireland's decade-long credit and housing boom had turned to bust. In what remains a controversial decision, the government announced a state guarantee of all bank liabilities in order to avert a collapse of Ireland's financial system. By 2010, Irish government support for banks had risen to 32% of GDP and bond yields had shot to record levels. Ireland was forced to request a bailout from the International Monetary Fund (IMF) - the second euro country to do so, after Greece.
Since then the Irish economy has faced a wrenching adjustment. House prices have almost halved in value, a far greater decline than in other European economies. The Economist now rates Irish housing as being cheap relative to rents and incomes.
Wage restraint and a focus on cost control has hit living standards hard – but has helped make Irish goods and services more competitive in world markets. Unit labour costs, a standard measure of productivity, have fallen 18% since 2008. Prices in tourism and leisure, an area with major export potential in all the peripheral euro area nations, have fallen by 3% in Ireland in the last 3 years even as they have risen in Greece, Italy, Spain and Portugal.
Exports account for a higher proportion of the Irish economy than of the Greek, Spanish or Italian economies. Gains in competitiveness and a steady softening in the value of the euro have boosted exports. Over the last 3 years, Irish exports have risen 10% while Italian exports have grown by 1% and Greek exports have shrunk 8%. Last year alone, Irish exports of agricultural products to the UK grew by 17%.
Gains in competitiveness have been a boon for the Irish manufacturing sector. Last month the Purchasing Managers Indices showed that Irish manufacturing output rose at its fastest rate in over a year. This contrasts with shrinking manufacturing activity across the rest of the euro area – not just in Greece and Spain but also in Germany, Austria and the Netherlands.
Ireland is often bracketed with Greece, Portugal, Spain and Italy, but in many respects it has more in common with the economies of northern Europe. The country has solid, stable institutions. The World Economic Forum ranks the Irish economy well above the other European peripheral nations in its measure of competitiveness. Pro-capital policies have made Ireland a magnet for globally mobile companies. It is a measure of the change in the fortunes of the Irish economy that last year it attracted investments by a record number of foreign corporates.
Ireland has a precious commodity that is in short supply in the rest of the euro area periphery - credibility with the IMF and investors.
In its progress report on the Irish economy published in March, the IMF remarked that, "policy implementation has continued to be strong...[the IMF's] 2011 fiscal targets were met with a margin...[the IMF's targets] for bank deleveraging were met". Greece is, to put it mildly, unlikely to get such a positive verdict from the IMF and the EU when they report in the next month or two.
Progress on reducing government borrowing and cleaning up banks has cheered investors. As a result, Irish government bonds have risen in value by 40% and Irish equities are up 35% in the last year. Last month Ireland was able to return to international bond markets and raise debt for the first time since its bailout in 2010.
Of course, Ireland continues to face great challenges in coping with the aftermath of a long credit boom. It is heading in the right direction – but it is not out of the woods.
With house prices still falling, mortgage arrears continue to rise as households struggle with high indebtedness and declining incomes, raising new concerns over the health of Irish banks.
More importantly, Ireland needs overseas demand for its goods and services and for the assets its banks need to sell. Yet demand in the rest of the EU, Ireland's largest trading partner, remains weak and uncertain.
Change is happening in Ireland, making it in some respects a model for what the IMF would like to see elsewhere in Europe.
Yet the sobering thought is that adjustment – of wages, debt, credit and prices - is insufficient on its own. Even the world's most competitive economy needs a buyer for its produce.