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There are three reasons to believe stabilisation is attainable.
The first is that deficits and debts are being brought under control through a combination of fiscal efforts and substantial debt relief. Italy, Ireland and Greece should run primary budget surpluses—before interest costs—next year. At the same time, the very long-term maturities and ultralow interest rates of official-sector loans amount to a giant subsidy from Northern to Southern Europe. Further debt relief for Portugal and Greece seems likely when their programs are reviewed later this year.
Second, the worst-affected crisis economies appear to be past the worst. True, there have been false dawns before, including earlier this year when an expected recovery was killed off partly by the slowdown in China. But Spain and Greece are forecast to return to modest growth next year, if not before, helped by an easing of austerity. Structural reforms are paying off: Unit labor costs have fallen, allowing competitiveness to be regained. In Ireland, unemployment is falling. And across Europe's periphery, current-account deficits have been closed, helped by surging export growth, particularly in Spain and Portugal.
Third, the eurozone's proposed banking union is a potentially more significant game-changer than the markets may yet appreciate. Arguments over the lack of a common fiscal backstop are a red herring. The important point is that the toxic link between banks and sovereigns will finally be broken as legal mechanisms are put in place to ensure the cost of future rescues falls on bondholders rather than governments.
In this context, the bank-asset-quality reviews that the ECB will undertake next year before taking over responsibility for eurozone bank supervision are shaping up to be a decisive moment in the crisis. If the ECB can convince investors that banks are safe, money should start to flow more freely again across borders, reviving Europe's splintered single market.
This doesn't mean the crisis isn't over. Tough negotiations lie ahead after the summer over the bailout programmes of Portugal and Greece, Italy's deficit targets and the final elements of the banking union. And growth is likely to remain sluggish for years, including in economies such as France and Italy, adding to political tensions.
But it looks increasingly clear that the eurozone can muddle through without full blown political and fiscal union—something that all except the europhobes and eurofanatics should welcome.
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