Euro-area peripheral nations are “at best” halfway throughcorrecting the economic imbalances that helped cause the debtcrisis and must press on with structural reforms, Moody's InvestorsService said.

“Adjustments, both in the periphery and the core, have alreadytaken place — in some cases, to a significant degree,” Moody'sanalysts including by Sovereign Chief Economist Lucio Vinhas deSouza in New York said in a report published today. The process “isat best only half complete.”

Policy makers in the struggling nations of Europe's peripheryare trying to rewire their economies to generate the growth theyneed to pay their debts. The European Union and the InternationalMonetary Fund have pledged at least 393 billion euros ($485billion) in aid to Greece, Ireland, Portugal and Spain to help thempay their bills while they implement reforms.

While Moody's noted progress in some countries' trade balancesand labor competitiveness, it said that governments cannot easeback on the pace of reform. The report didn't mention the creditratings of any nations.

“A comparison with the crises faced by Sweden and Finland in the1990s shows that the complete unwinding of the periphery countries'accumulated imbalances — which were due to the dis-saving behaviorin their respective domestic private sectors rather than theirgovernments — may still take several years,” Moody's said. “Thecomparison also reinforces the critical importance of structuralreforms for the achievement of sustainable gains.”

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

Moody's said that most of the gains in competitiveness have beenachieved by companies sustaining production even as they reducestaff numbers.

“Competitiveness gains in the euro area periphery seem to havecome about as a result of improvements in productivity that reliedmostly on employment falling faster than output,” the analystssaid.

European Central Bank President Mario Draghi said earlier thismonth the central bank could purchase sovereign debt alongsideeuro-area bailout funds to help lower borrowing costs and givegovernments time to implement reforms. The ECB said it wouldundertake the purchases only if countries applied for similarsupport from Europe's rescue fund and accepted strict conditions.Italy and Spain have yet to decide whether they'll requesthelp.

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

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