BRUSSELS – Sentiment in European financial markets has turned. For the moment, the possibility of a Greek exit from the eurozone is off the table. If interest-rate spreads on Spanish and Italian government bonds are any guide, bondholders are no longer betting on a eurozone breakup. European stocks even rose in the week following last month’s inconclusive Italian elections.
Investors evidently believe that Europe’s leaders will do just enough to hold their monetary union together. But, at the same time, it is unlikely that Europe’s economy will follow the pattern of emerging-market crises and rise, phoenix-like, from the ashes. Rather, the most likely scenario appears to be a Japanese-style lost decade of slow or no growth.