A move by European nations to more closely unite their fiscal policies sent stock markets higher Friday as it raised hopes that attempts to address the continent's debt crisis won't devolve into chaos.
The agreement, while significant, isn't a one-step roadmap for ending the euro zone's debt crisis, however. And it doesn't resolve a vital question for the rest of the world: Could the challenges in Europe result in a global recession next year?
The core challenge for the US as well as Europe is how to grow while households and governments are basically in retrenchment mode – tempering their spending after years of fast-rising debt.
For now, many economists are forecasting tepid growth globally, but with recession in Europe and some significant uncertainty elsewhere.
"We project that the global expansion will continue, albeit at a below-average pace," economists at Wells Fargo write in an outlook released this week. But they add that this forecast hinges on no deepening of troubles in the euro zone, "and the probability of another global financial crisis that emanates this time from Europe is not insignificant."
In the accord reached Friday, most European Union nations pledged to work toward a new EU treaty to demand greater fiscal discipline. Nations would face penalties for running up deficits.
The deal also provides for an expanded bailout fund for member nations such as Ireland that have faced investor doubts about their solvency.
In the short run, one key result of the deal is simply to keep hope alive that the debt problems can be addressed in an orderly way. It suggests that the European Central Bank (ECB) will provide a backstop to prevent a panic over whether high-debt nations like Italy might have to default, which would be a catastrophe for the private-sector banks that hold their debts.
"The main purpose of this deal is to ensure that the ECB will be given the comfort it requires" to offer such aid, Willem Buiter, chief economist at Citigroup, wrote earlier this week. But he predicted that ECB support will not be open-ended, and "will be revealed one intervention at a time, over a period of months – possibly years."
Although most EU members appear ready to adopt the closer economic union, Britain refused to sign on and could become less important a player within the EU as a result. (Although it's part of the EU, Britain has retained its own currency rather than adopt the euro.)
Even with the deal, Europe's predicament has dampened the outlook for the world economy.
The forecasters at Wells Fargo call for world economic growth of 3.2 percent next year (a bit slower than this year's pace), with 2 percent gains in the US, 5.3 percent on average in developing nations, and a 0.1 percent decline in output for the nations within euro currency union.
That pace is slow when you consider population growth, which tends to push gross domestic product (GDP) higher each year.
But the good news would be that global growth is better than global recession. A disorderly outcome in Europe, for example, could have sent shock waves through the financial system worldwide, slowing growth in the US.
As it stands, the Dow Jones Industrial Average stood above the 12000 level on Friday and mid-day, with a gain of 1 percent from the prior day's close.
Although Europe is the weakest part of the world economy, not much strength is visible elsewhere.
A global index of manufacturing activity, tracked by J.P. Morgan and Markit, has dipped below 50 in recent months (any reading below 50 suggests contraction rather than expansion), with weakness seen in Asia and Latin America as well as Europe.
Some economists including Gary Shilling, who heads a forecasting firm in Springfield, N.J., say global recession remains a significant risk for 2012.