Recent events in Italy, Cyprus and Portugal have put a dent in hopes that the three-year crisis in the euro-zone is finally drawing to a close. Meanwhile, previous tentative signs that the broader economy might be recovering in response to the period of relatively calm financial market conditions appear to be fading. With global growth weak and fiscal austerity still biting, we maintain our well-below consensus forecast that the euro-zone economy will contract by as much as 2% this year. Against this background, the dangers of renewed bouts of market turmoil and uncertainty over the future of the currency union are set to persist.
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