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If financial markets began to sense that eurozone disputes are undermining the political will to secure progress on banking and fiscal union, and if governments such as Spain's refuse to ask for the official support that they need, then, as currently designed, the ECB's “bazooka” will begin to lose its potency.
So Europe's politicians will have to take care that they do not let divisions or loss of momentum for reform undermine the fragile confidence. Last week's news that the IMF, the European Commission and the ECB – the troika – with clear support from Germany, are moving towards giving Greece more time to implement a root-and-branch reform programme should be seen as part of a confidence-building exercise. The EU must also avoid more trouble, such as a confidence-sapping bust-up at the summit on 22-23 November (devoted to the budget for 2014-20) or at December's meeting (earmarked as a follow-up on the eurozone crisis).
Europe must hope, too, that the American injections of liquidity, which have calmed European markets, will reassure US investors after the election on 6 November. Fears of post-election political gridlock over the looming fiscal cliff of automatic tax rises and spending cuts is already, US business leaders say, beginning to undermine confidence in the sputtering economic recovery.
Compared with the end of 2011 and early 2012, when the ECB had to come to the rescue of Europe's imploding financial sector with its long-term refinancing operations, the economic outlook has improved significantly. “Our judgement [is] that the broader headwinds holding back euro area growth will be less intense next year than they have been this”, says David Mackie, chief European economist at JP Morgan. Unicredit's Edgeworth sees “signs of a bumpy recovery”. The autumn forecasts from the Commission, due out on 7 November, are unlikely to be any more optimistic.
With unemployment at record levels and inequality rising, political instability is emerging as possibly as big a threat to the eurozone next year as financial stability has been in 2012. This is no time for complacency.
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