Economist warns eurozone may face new debt crisis

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DAVOS, Switzerland -- Even as the head of the European Central Bank talked Friday of "positive contagion" in the markets and predicted an economic recovery for the recession-hit eurozone later this year, economist Barry Eichengreen warned that the debt crisis that has shaken Europe to its core could easily erupt again this year unless European leaders move faster to solve their problems.

While European governments and markets have been breathing easier in recent months after years of turmoil, it's no time for complacency, said Mr. Eichengreen, who has chronicled the Great Depression and explored the consequences of a breakup of the euro currency used by 17 nations.

"Nothing has been resolved in the eurozone, where markets have swung from undue pessimism to undue optimism," he told The Associated Press in an interview at the World Economic Forum in Davos, Switzerland.

"They said all the right things last year ... and they've been backtracking ever since," he said.

Mr. Eichengreen, a professor at the University of California, Berkeley, warns that the crisis over too much debt burdening governments and banks in the 17-country currency group "is going to heat up again in 2013."

European leaders in Davos this week are seeking to reassure investors and corporate leaders that the continent is on the mend after its punishing debt crises.

European Central Bank chief Mario Draghi on Friday forecast a recovery in the eurozone economy in the second half of the year, and spoke of "a new restored sense of relative tranquility" and "positive contagion on the financial markets."

But, he acknowledged, "we don't see this being transmitted into the real economy yet."

Mr. Draghi said governments need to move ahead with structural reforms to make their economies grow faster, which will help reduce government debt.

Concerns about Europe's economic future -- and the threat that Britain could one day pull out of the European Union, whose 27 members together make up the world's largest economy -- clouded this year's gathering in the Swiss Alpine resort of Davos.

The forum pulls together corporate and political leaders who strike business deals, strategize about world problems and attend lavish parties -- and comes under regular criticism from activists and workers who say the elite event is disconnected from the world's economic realities.

Activists at Davos took over a Shell station Friday to protest drilling for oil in the Arctic.

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