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Eurozone debt crisis: The calm before the storm

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(BRUSSELS) - After taking a relentless pounding from the markets last year, the eurozone is breathing easier these days, but analysts warn it may just be the calm before another storm for the debt-stricken bloc.

A drive to coordinate the economic and fiscal policies of the 17 nations that share the euro, coupled with plans to boost a debt rescue fund, have helped to ease market fears about the single currency area.

For billionaire investor George Soros, Europe's debt crisis is "about to be resolved," although he warned that the new system was also flawed because it would cast in stone divergences between strong and fragile economies.

"There is now a determination to make up the missing element, which is a common fiscal policy or a common treasury," Soros told a security conference in Munich, Germany, last Friday.

European Union president Herman Van Rompuy boasted on Tuesday that the measures taken by governments last year were "clearly paying off."

Last year, Greece and Ireland received the first bailouts in the eurozone's history, the bloc created a 750-billion-euro financial backstop and leaders agreed to create a permanent crisis rescue fund.

After weeks of pressure from the markets, Portugal and Spain had relatively successful sovereign bond sales this year, easing fears that they could soon need their own bailouts.

"The outlook of the European economy has substantially improved including in the eurozone countries which recently were in difficulty," Van Rompuy told leading European lawmakers.

"However, we are aware that there is still a lot of homework to do. It is not the time for complacency. We will draw the lessons from the crisis."

Economists, however, see storm clouds on the horizon in the form of banks exposed to bad investments and a new chapter in the Greek drama.

"The sovereign debt crisis is far from being resolved," said Morgan Stanley Research analysts, pointing out that "most measures taken so far only provide liquidity" -- enough to keep the system afloat but not resolve the underlying problems.

They said some decisions already taken "even constitute a step change in the economic governance of the euro area but they are not a silver bullet to end the sovereign debt crisis once and for all."

At a summit last week, Germany and France pushed for a pact aimed at harmonising key elements in fiscal and economic policy in order to prevent another crisis of the kind that saw Greece and Ireland need to be rescued.

Eurozone leaders will hold an extraordinary summit on March 13 to discuss the plans, a diplomat said. They will then meet with the other 10 leaders of the European Union on March 24-25 to finalise the package.

In addition to discussing the Franco-German plan, EU leaders also want to boost the 440-billion-euro ($600 billion) European Financial Stability Facility (EFSF), created last year to rescue distressed economies.

But eurozone countries have voiced deep reservations about elements of the Franco-German pact, with divisions sure to resurface when finance ministers gather for two days of detailed talks from Monday.

Some economists remain unconvinced too.

Royal Bank of Scotland's Silvio Peruzzo insisted: "If you look at the fundamental issues, none ... has been addressed or solved.

"They all remain in the periphery -- the dynamics of the debt sustainability, the low growth environment."

He added that Spain still had to "fully" address its banking sector's problems.

Andre Sapir, a Brussels policy analyst at the Bruegel Institute, said Europe was far from turning the last page on the Greek debt tragedy.

"There is little likelihood that Greece can emerge solvent," he said, warning that "one day or another, we will have to reduce the Greek debt."

During a visit to Athens, Luxembourg Prime Minister Jean-Claude Juncker, head of the Eurogroup of finance ministers, insisted the eurozone would overcome the crisis.

"The euro will survive and Greece will be among the survivors," he said after meeting Greek Prime Minister George Papandreou.

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