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Euro Zone Hit by Markets' 'Over-Expectation': Economist


Markets expect too much from European policymakers when it comes to plans to solve the euro zone debt crisis, which worsened on Friday when rating agency Standard & Poor's downgraded some euro members, a former Bank of England official told CNBC.

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“There’s an over-expectation that the all-singing, all dancing plan will be revealed,” Andrew Sentance, a former member of the Bank of England’s Monetary Policy Committee and Senior Economic Adviser to PwC, said.

He believes that markets will adjust quickly to Friday’s downgrades, but that “fundamental issues” with the euro zone will continue to cause problems.

“There are two big factors: first, the willingness of countries that have the biggest debts to stick to their plans and, secondly, the degree of support in the short term to ensure that they can keep financing their debt,” he said.

“We shouldn’t be surprised that we have got a bit of market nervousness about the euro area.”

Greek Prime Minister Lucas Papademos, who is presiding over the reform of the most heavily indebted euro zone economy, told CNBC in an exclusive interview that he is confident the country can get through the next few months without defaulting on its debt repayments.

“The key thing for policymakers is to show that they are committed to the track that they are on,” said Sentance.

“They need to make sure that countries with the highest deficits and debt are getting them down and that there’s adequate support mechanisms within the euro area as a whole.”

Too Much Austerity, Too Little Growth

Some analysts have criticized the current plans to rescue peripheral euro zone economies for being too focused on austerity at the expense of growth.

Mario Monti, the recently-appointed technocrat Prime Minister of Italy, warned last week that his country could fall into the hands of anti-European Union politicians if austerity is not combined with change elsewhere in the EU.

A recent poll showed growing disapproval of the euro in Italy.