The euro zone debt and banking crisis is like the Tour de France cycling epic now approaching its half-way stage: a lot of gruelling climbing, sprint-like bursts of progress and the occasional calm stage on the flat.
Hard work is the hallmark of both. There are no short cuts to a finishing line that looks impossibly distant. And with accidents and fatigue taking their toll, none of the participants can be sure who will make it to the end.
A revised budget deal in Spain this week marks a tweak in tactics for tackling the crisis, giving Madrid more time to meet Europe's deficit reduction targets in return for deeper spending cuts.
But it does not change the big picture. Like the riders trekking across France, deeply indebted countries on the euro zone periphery will have to keep pushing through the pain barrier even though their efforts are unlikely to be rewarded with stronger growth or lower borrowing costs any time soon.
Indeed, high bond yields in Spain and Italy, now the heart of the crisis, testify to investors' fears that austerity drives will prove self-defeating by prolonging economic stagnation and so increasing the burden of servicing debt.
"I don't know of any situation in the world where a reduction of the debt-to-GDP ratio has been achieved by reducing GDP," said Professor Richard Cooper of Harvard University.
SPANISH QUID PRO QUO
Also Read
By relaxing the 2012 budget deficit target and giving Madrid an extra year to bring the shortfall below the mandated 3 percent threshold, euro zone ministers are recognising the risk that Spain could follow Greece into a downward spiral whereby contracting output triggers demands for ever sharper budget cuts that in turn suck more air out of the economy.
But the accompanying message is that, while course corrections are possible, the goal of reducing debt to more-sustainable levels is not negotiable.
If a root cause of the euro crisis is too much debt - be it the legacy of overspending or the by-product of bailing out banks - then adding to the mountain is not a long-term answer.
"Just as the challenges of anaemic growth and high debt did not build up overnight, so too should the solutions not be expected to magically fix all the difficulties right away," Aasim Husain, deputy director of the International Monetary Fund's European Department, said in presenting the IMF's annual health check on Italy.
Husain praised Rome for the adjustments it had already made and noted that Italy this year would have the biggest primary budget surplus - that is, before interest costs - in the euro zone. But he said a lot remained to be done to restore dynamism to an economy that has barely grown over the past decade.
Liberalising Italy's product and labour markets to bring them in line with the median of other advanced economies could raise the level of GDP by a whopping 6 percent over the medium term, the IMF reckons. One concrete example: electricity prices in Italy are about 50 percent higher than the European average.
"The important thing is to move forcefully and expeditiously to implement the reform agenda," Husain said on a conference call.
Reforms and deficit cuts by euro zone debtors are also part of a grand bargain implicitly being underwritten by Germany and other northern creditors, which are prepared, reluctantly, to keep financing the adjustment of periphery countries as long as they take their medicine.
So while economists rightly point out that Spanish consumer spending will be hit by a 3 percentage point rise in value added tax as well as cuts in unemployment benefits and civil service pay, the belt-tightening is a price Madrid had to pay.
"The measures are simply necessary to obtain political agreement from euro area creditor countries to continue and possibly extend support measures," said Ebrahim Rahbari, an economist at Citigroup.
A change of heart by Prime Minister Mariano Rajoy's government, which is now prepared to impose losses on holders of subordinated debt and hybrid securities issued by capital-strapped Spanish banks, should be seen in the same light.
The U-turn is politically fraught as retail depositors hold an estimated 30 billion euros of the securities. But, as Goldman Sachs pointed out in a note, the tough conditionality shows that the economic surveillance process emerging from the euro zone crisis has some teeth.
SLOW IMPROVEMENT
Will it work in the end? Can the slow-growing, heavily indebted south starve its way back to health?
Underlying budgetary positions are gradually improving.
Taking the GDP-weighted average of Italy, Spain, Ireland, Portugal and Greece, the projections of those governments point to a reduction in their collective deficit to 3.6 percent of GDP this year from 6.3 percent in 2011, according to JP Morgan.
The bank reckons this is optimistic given the deteriorating economy and has pencilled in a deficit of 4.3 percent of GDP. By the end of 2013, though, it expects the shortfall to have shrunk to 3.1 percent, within touching distance of the 3 percent benchmark.
International lenders gave bailed-out Ireland a clean bill of health on Thursday.
Portugal, too, is sticking to its loans-for-reforms programme and even managed to eke out a current account surplus in April.
But with all but the bravest non-domestic investors shunning periphery debt, and economic conditions deteriorating, a solid consensus has formed that adherence to austerity and reform will not restore market confidence.
Nor has a modest growth package and agreement in principle at last month's EU summit to move towards a European banking union soothed nerves. Senior politicians speak openly of the euro zone being at a critical juncture.
For many in the markets, only the European Central Bank can ride to the rescue with forceful intervention that changes expectations. Richard Portes of the London Business School says the ECB, which has been hamstrung by German-led hardliners, should announce a cap on bond yields for solvent countries.
If yields continue to rise, as they may do in the absence of a decisive ECB response, Spain and possibly Italy may have to ask for outside support within weeks, Berenberg Bank economists Holger Schmieding and Christian Schulz said.
They were critical of the ECB for being behind the curve but said if all other options had been exhausted, such as secondary-market purchases by the euro zone's rescue funds, the ECB would step in more forcefully to bring the crisis under control.
Otherwise, decades of hard pedalling will have been in vain.
"Our core conviction remains: the ECB will not commit suicide and let the euro implode," they said in a report.