Tensions surrounding the eurozone have eased markedly in the early part of 2012 following the atmosphere of crisis that persisted through the second half of 2011. There is instead a new confidence that financial and economic disaster can be averted. Several developments have contributed to this optimism, including a change of government in Italy, a large injection of liquidity into the banking system by the European Central Bank (ECB), and a 'fiscal compact' among governments. The euro itself has strengthened on currency markets, and the perception of reduced risk can be seen in lower market yields on Italian and Spanish government bonds.
This does not mean that the future of the eurozone is yet assured. The steps taken so far by governments and other bodies are, in fact, widely acknowledged to be inadequate. For months, official responses to the market mayhem – in which it was feared that Italy and Spain would follow Greece, Ireland and Portugal in needing financial rescue, with the risk of debt defaults and huge bank losses – were stumbling, and failed to instil confidence. Even after the more positive recent steps, it is commonly agreed that governments have not yet arranged sufficiently large 'firewalls' to ensure that there are adequate amounts of emergency money on hand to deal with a new funding crisis in a member country. Meanwhile, there is still considerable debate about the proper functions of the ECB. In addition, it remains to be seen whether countries that have lagged behind can improve their economic competitiveness so as to reduce imbalances within the eurozone and thus make the common currency viable for the long term.
Nevertheless, even as Greeks protest bitterly against the terms attached to their country’s latest rescue package, there is no doubt that the frenzy of previous months has dissipated and that, while efforts to save the eurozone are still urgent, they can be addressed more calmly.