The Eurozone crisis has been going on for three years now, though it sometimes feels like three decades. There has been remarkable sameness to the pattern throughout that time: Political leaders offer inadequate solutions to what ought to be manageable problems; markets react badly, driving borrowing costs up across the European periphery, the fears that the whole Eurosystem could collapse focuses the resolve of the political leaders, who finally do just enough that the European Central Bank feels comfortable coming in with a wall of money to contain the crisis.
Calm returns, and then the whole process repeats itself a few months later.
That is roughly what happened in May 2010, November 2010, July 2011, November 2011, and June 2012. But as a new wave of fears emerged over the last few days, this time over the fate of Italy, there has been some welcome evidence that the pattern has finally been broken.
On Friday, the center-right party of Silvio Berlusconi—the boisterous, bunga-bunga loving former prime minister—withdrew support for the coalition government of Mario Monti, and Saturday Monti said he will step down after passing next year’s budget. All of that sets the stage for a contentious Italian election in February or March, in a time of government austerity and recession, with a possibility (though polls suggest it is a distant one) of Berlusconi returning to power. If, that is, he can avoid conviction for consorting with an underage prostitute.
The reaction on markets will seem familiar. Investors sold off Italian bonds, driving the country’s cost to borrow money for 10 years up 0.29 percentage points, to 4.80 percent Monday. There was some contagion to other nations with questionable finances, with Spanish 10 year rates rising 0.10 percentage points, which the Spanish finance minister blamed on Italian uncertainty in a radio interview. Stocks fell in much of Europe, with the Italian market down 2.7 percent.
But more notable is what markets aren’t doing in response to the headlines from Italy. They aren’t betting that the euro itself will collapse. The currency was basically unchanged against the dollar Monday (a euro went for $1.294 on global currency markets). And while there are signs of contagion to Spain, the same can’t be said of all the peripheral European countries that have been in crisis. Greek bonds actually rose sharply Monday. German bonds, which have usually moved inversely to those of the periphery in times of panic as investors viewed them as a safe haven, were basically unchanged.
Markets were doing what markets do: Adjusting prices based on the latest news about a country with a long history of unstable politics. But what investors didn’t do is immediately extrapolate from “Italy’s political situation could be hairy for the next few months” to “and this will cause the entire Eurozone to unravel.”
Ultimately, investors have greater trust now than at any time in the last three years that European authorities have the resolve, and the tools, to hold the continent together. They know that the ECB stands ready to buy bonds of a nation to counteract speculation that the euro itself will collapse. They know that the governments stand ready to collectively back the banks of any of the continent’s countries, even if the exact institutional details of how that will work are still being sorted out.
The endless European crisis isn’t over exactly. And the European economy is in miserable shape; just Friday, the German Bundesbank slashed its forecast for growth in the continent’s largest nation and economic powerhouse to 0.4 percent for 2013, down from 1.6 percent, and the ECB slashed its own growth forecasts for the Eurozone the day before.
But European leaders have turned what was an existential crisis for their union and for the world financial system into something more boring: Government austerity and a resulting recession. It’s no bunga bunga party, but it beats the alternative.