Win-win moment in Europe takes edge off summer of gloomy predictions

 Europe moves into summer on a more affirmative note after an EU decision to pull Italy and Spain from the brink,  and after a remarkable victory by Spain in the Euro 2012 games Sunday that restored national pride just when it was at an ebb.

Ugly euro-crisis dynamics threaten to make it a summer of gnashing teeth and social unrest, especially on Europe’s southern tier, where unemployment among youth averages 40 percent.

And now with an audit in France showing that President François Hollande must find $40 billion in austerity cuts in the next 18 months, it is hardly business as usual on the Continent during vacation.

But spirits lifted almost in surprise after Germany’s chancellor Angela Merkel made concessions from her austerity-only approach last week, and streets in Madrid turned ecstatic after the Spanish team won its third straight international match, something never done before.

For the first time in the euro crisis, analysts are talking “win-win,” however qualified.

The June 29 EU meeting seemed ready to fail but ended on high note, albeit qualified, after Mrs. Merkel, in concert with Italian Prime Minister Mario Monti, agreed to allow a $650 billion European rescue fund to buy bank debt and stop the “contagion” of market speculation that was engulfing Italy and Spain. (On cue, Italy’s soccer team promptly beat the Germans in the Euro 2012 semi-finals.)

The effect of the decision brought immediate rejoicing in Ireland, which has a surfeit of bank debt pulling down its economy;  sighs of relief were heard in many European capitals.  

“The principle of a direct recapitalization of banks by the European Stability Mechanism without increasing the sovereign debt of a country is a significant advance,” says Thibault Mercier, economist at BNP Paribas in Paris, “and it is useful for Spain, which faces potentially as much as 100 billion euros of bank recapitalization.”

“The political tempo of the European construction is very slow,” Mr. Mercier continued, “and what was achieved in the last few months was quick, even if it seemed too slow for the markets and for investors.”

Is the euro crisis over?

Hardly.

1 | 2

Next