European leaders hail breakthrough in debt crisis

To be sure, there are signs of fiscal improvement. Excluding the massive interest payments on their debts, both Italy and Greece are posting budget surpluses after gutting spending and raising taxes, and Spain saw a surprise improvement in December unemployment, though the jobless rate remains at about 25 percent.

Possible turning point

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Spain’s austerity crisis: The number of people officially registered as unemployed in Spain has edged up toward 5 million.

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The crisis has raised issues of European integration that will take years to work out and will test the willingness of nations to cede more national powers to build the dream of a united Europe. But regional leaders think they may have reached a turning point, with markets calmed by two events in particular.

An agreement in December between Greece and its creditors in the European Union to release bailout funds appeared to answer the question, at least for now, of whether the region would stand behind its most troubled member. That came after a landmark pledge by the ECB to stage massive purchases of the bonds of ailing countries should they apply for aid from Europe’s rescue fund, creating an important safety net from harsh market forces.

French President Francois Hollande, in a New Year’s Eve greeting from Paris, warned his countrymen that 2013 looks to be a difficult year, with almost no economic growth in the first half and an unemployment rate that is likely to climb before it gets better. But echoing others in the region, he said the threat to the euro seems to be under control despite last year’s dire predictions.

“The euro zone has been safeguarded, and Europe has at last put into place the instruments of stability and growth that it lacked,” Hollande said. “Even six months ago, this result seemed out of reach. It has been achieved.”

In recent comments, Spain’s Prime Minister Mariano Rajoy said, “I am totally and absolutely convinced that the worst has passed.” Germany’s influential finance minister, Wolfgang Schaeuble, used almost the exact same words in an interview with the Bild newspaper.

But German Chancellor Angela Merkel, Europe’s champion of fiscal discipline, has been decidedly less upbeat. In her end-of-year greetings, Merkel stressed that Europe has a long road ahead to recover economic growth. Leaders also have some heavy lifting to do: Markets are waiting for clarity about how and when much-lauded agreements — such as a plan to make the ECB the region’s banking overlord, able to overrule national regulators and take over troubled financial institutions — will come to fruition.

“The reforms we have decided on are beginning to produce their effects,” she said. “But we still need a lot of patience. The crisis is far from overcome.”

Key elections ahead

The potential land mines are many, with the most immediate being elections in Italy next month pitting the technocrat interim Prime Minister Mario Monti — whose tough reforms were seen as preventing disaster in the country last year — against Silvio Berlusconi, Italy’s former longtime leader and its most infamous playboy. Berlusconi has assailed Monti’s austerity measures as diktats from Germany. But leading the polls there is the center-left’s Pier Luigi Bersani, a 61-year-old former Communist whose current stated support of Monti’s austerity measures will probably be opposed by his own rank and file.

Europe’s fate is also caught up in another national election — in Germany this September, when the domestically popular Merkel will seek another term.

The “Iron Chancellor” is loath to be seen as soft on Greece, a country whose bailout has stung German taxpayers. But many also say that Merkel will hesitate to go as far as cutting off bailout funds from Greece — an act that would effectively force it out of the euro zone — if that country once again misses its fiscal targets, as some predict.

“You have to think [Greece’s creditors in Europe] are going to be willing to turn a blind eye to certain shortfalls this year,” said Diego Iscaro, senior economist with IHS Global Insight in London. “With their elections, the Germans especially are going to want to avoid the risk of creating more contagion.”

Cody reported from Paris. Eliza Mackintosh contributed to this report.