European financial markets seem convinced the Eurozone’s debt crisis is over, even as the euro rose in value to a 10-month high on Thursday, January 17.
But the optimism in the financial markets has yet to be confirmed by a recovery in most European economies.
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Even Germany’s economy, once stalwart, suffered a 2% decline in gross domestic product in the fourth quarter of 2012.
Positive signs in the markets are gaining momentum. Both Spanish and Italian government bonds have been strengthening over the past six months. The tensions in Europe’s banking system have abated.
Countries like Spain, Italy, and Portugal that were not so long ago on the brink of default are now steadily reducing their reliance on foreign borrowing to support their economies.
Fears that the euro would unravel now seem like a distant memory. Investors have confidence that whatever money they put into the Eurozone’s periphery they will indeed see again.
Well-heeled investors from northern Europe have halted their flight from the Eurozone’s indebted south; some are even moving back in.
Rapidly shrinking economic deficits are a driving force. But businesses are still starved for capital and have halted investment and hiring—both of which are needed if the economy is to recover.
Optimistic investors say that better conditions
in the financial markets will flow through to businesses and households during 2013 and will finally pull Europe out of its woes.