Plenty remains to be done. Spain will release critical details of its upcoming budget and a pending bank rescue program this week, politically sensitive announcements that triggered large protests in Madrid on Tuesday in opposition to continued government austerity programs.
Greek, European and International Monetary Fund officials remain at odds over how to fix Greece’s problems. Important proposals such as the establishment of a European banking union have been accepted in theory but not completed. And the region’s economy is firmly in recession.
Yet the likelihood of an acute new crisis arising from Europe — a preoccupation of policymakers in the United States and elsewhere for going on three years — seems to be fading along with the risk of a broader breakup of the 17-nation currency union.
Recent actions, most notably promises by the European Central Bank to begin buying government bonds in unlimited amounts, were “clearly a turning point,” IMF Managing Director Christine Lagarde said this week. “I can’t say enough about how good the [ECB] decision was in the view of stabilizing markets.”
After pressuring Europe since early 2010 to take many of the steps eventually enacted, U.S. Treasury Secretary Timothy F. Geithner said at a forum in New York on Tuesday that the situation now “looks a little better than it did,” with measures in place to finance troubled governments as they work to revive their economies.
Analysts and investors have begun to temper their concerns about short-term calamity. The money pushing up Spanish and other European stock indexes and bolstering the value of beleaguered bank shares is another positive sign.
Even usually hawkish analysts such as those at London-based Capital Economics, among the staunchest euro pessimists, acknowledged that recent events “have arguably brought the euro zone back from the brink.”
Along with the ECB’s bond-buying announcement, a subsequent German court ruling paved the way for a new bailout fund to begin operations. It is now scheduled for early October. And tentative steps have been taken to create a banking union to better regulate European financial institutions and share the cost of any major failure.
The crisis in the euro zone emanated from Greece’s slide into insolvency but broadened into a series of interrelated problems: Collapsing property values in some nations broke the financial health of governments that were forced to bail out local banks. Healthy banks suddenly faced losses because they had invested in shaky government bonds. Slow economic growth compounded the problem.