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All the worries about contagion and the risk of the euro coming apart at the seams, so keenly felt barely a few weeks ago, appear to have evaporated into thin air. European shares have made an impressive start to 2012 (up by almost 7% since end-2011) and yields on 10-year Italian sovereign bonds have dropped back below 7%. So, what has fuelled this new-found optimism? Below, we have sought to analyse factors that have contributed to changing perceptions about the eurozone crisis and have sketched out a scenario of how things might develop from here. Fears about the eurozone’s future have diminished thanks to positive developments on three separate fronts: institutional, monetary policy and economic.

Subtle shift in attitudes in GermanyThe shake-up of governments in five countries in distress made it feasible to implement a policy of budgetary rigour warranted by the parlous state of their public-sector finances. This constituted just the first stage though. To soothe German fears about having to stand as perpetual guarantor for the debts of the whole eurozone, there needed to be a firm long-term commitment to this budget discipline. In spite of the UK’s objections, EU Heads of State at their summit meetings on 9 December and 30 January sought to meet these expectations, something they managed with surprising alacrity. 
 

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