“A comparison with the crises faced by Sweden and Finland in the 1990s shows that the complete unwinding of the periphery countries' accumulated imbalances — which were due to the dis-saving behavior in their respective domestic private sectors rather than their governments — may still take several years,” Moody's said. “The comparison also reinforces the critical importance of structural reforms for the achievement of sustainable gains.”

Among the adjustment successes so far, Spanish labor costs have dropped 5.9 percent from their peak, while those in Greece and Ireland have fallen 7.8 percent and 13.7 percent, respectively, helping to support exports and sustain economic output as their governments cut spending at home, Moody's said. Italy has so far failed to narrow its trade deficit, bring down labor costs or boost competitiveness relative to its euro-area partners, it said.

Moody's said that most of the gains in competitiveness have been achieved by companies sustaining production even as they reduce staff numbers.

“Competitiveness gains in the euro area periphery seem to have come about as a result of improvements in productivity that relied mostly on employment falling faster than output,” the analysts said.

European Central Bank President Mario Draghi said earlier this month the central bank could purchase sovereign debt alongside euro-area bailout funds to help lower borrowing costs and give governments time to implement reforms. The ECB said it would undertake the purchases only if countries applied for similar support from Europe's rescue fund and accepted strict conditions. Italy and Spain have yet to decide whether they'll request help.

Draghi's plan has drawn criticism from Germany's Bundesbank, which said yesterday said it has “significant stability risks.”

Bloomberg News

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