A rare beast has reappeared in Europe. In recent years, there were no confirmed sightings. But in the past few weeks, this shy animal – known as 'good news' – has been spotted in various European locations.
Last Friday, the beast even appeared fleetingly in Brussels. For once, an EU summit did not end in acrimony or farce. Instead, European leaders reached an agreement on a budget – and nobody laughed.
Good news also made an appearance on Europe’s battered periphery. Ireland reached a deal that will ease the crushing burden of debt on its public finances. Enda Kenny, the prime minister, was applauded in parliament as he announced a "historic step on the road to economic recovery”. The Financial Times also reported a "brighter outlook” for Greece’s economy. In January, Portugal managed to return to the long-term debt market for the first time since the country was bailed out in 2011.
So is this the beginning of the great European bounceback?
Naturally, it is more complicated than that. What has happened in recent months is that the threat of a real disaster in Europe – such as a big bank failure or the break-up of the euro – has receded. As a result, investors are more confident. That, in turn, is helping to breathe life into the real economy. This is what Mario Draghi, the president of the European Central Bank, has described as "positive contagion". But pessimists need not despair. There is still plenty that could go wrong.
The eurozone crisis is played out on three different levels – financial, economic and political – each of which affects the others. The financial terrors have clearly lessened since Draghi promised to do "whatever it takes" to save the euro. The ECB’s pledge to make potentially "unlimited” purchases of sovereign bonds acted as a benign confidence trick – just making the promise has so far ensured that it has not had to be kept.
Yet, while financial pressures have eased, they have not disappeared. The financing needs of countries such as Italy and Spain remain formidable. Europe’s banks are still vulnerable. Sony Kapoor of Re-Define, a think-tank, points to Spain, where banks face "rising problems in the servicing of mortgages, falling house prices and a spike in bad loans.”
Most of the suggestions of a turnround come from the small countries on the periphery of the eurozone that have suffered worst – Ireland, Portugal and, above all, Greece, where the economy has shrunk by 25 per cent since 2008. Despite this disaster, Greece has not fallen out of the euro – nor has it been taken over by fascists or communists. If an economic revival gathers pace, Greece will defy the prophets of doom by emerging from the crisis with its currency and its democracy intact.
However, the mood in Italy and Spain is still bleak. Italy is in the midst of its worst recession since the second world war and Spain is suffering unemployment of 26 per cent. With little prospect of rapid economic revival in either country, the threat of social and political upheaval remains. The French economy is flirting with recession and President Franois Hollande is losing popularity fast.
The most immediate question over the European revival story is a political one: an Italian election on February 24-25. Mario Monti, the unelected technocrat whose period in office helped to revive international confidence in Italy, is highly unlikely to win. Any new government is likely to be less stable and more cautious about reform. A spell of paralysis – or any suggestion that Silvio Berlusconi will return as leader – could swiftly make Europe a 'bad news' story once again.
Political developments in Spain also point to trouble ahead. Mariano Rajoy, the prime minister, and his People’s party are mired in a corruption scandal involving allegations of illegal slush funds. Polls suggest 80 per cent of Spaniards think the PP leadership should resign en bloc. With the main opposition party also looking tired and discredited, there is a clear opening for new political forces. Given that youth unemployment is more than 50 per cent and parts of the country are threatening to secede, there is no guarantee that these new political forces will be of the cuddly, centrist variety.
Political turmoil in Spain and Italy would spook the markets again and make it harder to convince northern Europeans to organise further bailouts. Cyprus is likely to need a bailout next month but the country’s reputation as a haven for laundered Russian money will make it hard to persuade Germany’s parliament.
Yet the run of good news in Europe cannot simply be dismissed. Events in Greece, Portugal and elsewhere suggest that European social and political systems can take a great deal of punishment without collapsing. German politicians and European central bankers have also demonstrated they have the determination to keep the euro afloat.
But there will be further economic pain and political instability ahead. And European leaders must navigate this crisis without a convincing explanation for how it will end. From Berlin to Brussels, they continue to argue that the long-term solution to the crisis is much deeper political union. But there is little evidence that they have either the will or the public support ever to get to this elusive destination.
Copyright The Financial Times Limited 2013.