February 2, 2013

GUESS WHERE the world’s hot money is flowing these days? The correct answer, believe it or not, is Portugal, Ireland, Italy, Greece and Spain — the notoriously indebted “PIIGS” — which received a net $127 billion in new loans and investments during the last quarter of 2012. Government borrowing costs are coming down, and some major banks are beginning to repay crisis loans from the European Central Bank (ECB).

Europe is not headed for economic calamity or, worse, a political crack-up, anytime soon. The credit for this salutary turn of events, which hugely benefits the United States and the world economy — and which many experts considered unlikely or impossible as recently as a few months ago — belongs to Mario Draghi, the ECB president. He announced a plan to backstop government debt in September, essentially by offering to buy unlimited quantities of distressed countries’ bonds — in return for their commitment to structural reforms. Also crucial was the support of German Chancellor Angela Merkel, who quietly acquiesced in Mr. Draghi’s proposal despite its deviation from German economic orthodoxy.

Those investors getting back into the market are doing so on the assumption that the ECB, backed ultimately by financially solid Germany, will pay them back if all else fails. Indeed, the ECB has not actually had to buy any bonds; its promise was confidence-builder enough.

But no one should confuse this respite in Europe’s crisis with a solution to it. Unemployment in the euro zone — the 17-nation group that uses the common European currency — averaged 11.7 percent in December, and youth unemployment was double that. The International Monetary Fund expects the euro-zone economy to contract slightly overall this year, with the PIIGS experiencing the worst negative growth. Plans for a unified bank supervision and resolution authority are moving ahead but still far from finished. And the continent lacks another hallmark of a working currency union, namely a single system of bank deposit insurance.

The euro zone’s main piece of unfinished business is a broader economic restructuring that will reduce the imbalance between its super-competitive members, such as Germany, and the laggards, such as the PIIGS. That’s going to take not just the admittedly necessary reforms in the debtor countries that Germany has demanded in return for its money but also reform on Germany’s side of the equation.

Mr. Draghi has bought Europe time; politicians could still waste it. “Governments ought to be given credit for what they did,” he said last week at the World Economic Forum in Davos, Switzerland, but they “must persevere . . . especially on the front of structural reforms.” Mr. Draghi’s performance suggests his advice should be heeded.