Europe’s outlook is sunnier — at least for time being

July 27, 2010 at 12:00a.m.

Associated Press

BERLIN

Things are looking up for Europe’s economy — relatively speaking, at least.

Less than three months ago, fears were rife that the continent was headed for a government debt debacle and a painful economic crash. But upbeat economic signs — including robust German business confidence, predictions of stronger second-quarter growth and successful bond auctions by financially shaky Greece, Portugal and Spain — have helped change the picture.

Investors, meanwhile, are increasingly occupied not by Europe’s woes but by fears of weakening U.S. growth.

The latest piece in the puzzle: a placid market reaction Monday to last Friday’s release of “stress tests” designed to show how Europe’s banks would cope with a deepening economic and debt crisis. Only seven of the 91 institutes surveyed failed.

To be sure, several of the 16 governments that use the euro — Greece, Portugal, Italy and Ireland — still are buried in debt that will take years to work off, and Spain faces 20 percent unemployment.

And many analysts remain skeptical about whether the tests were tough enough to be credible. But that did not rattle markets or the euro, which has pulled back from a springtime slump.

The tests come on top of a May decision to put up nearly $1 trillion to backstop troubled governments, which also seems to have helped calm market turmoil.

The stress-test results mark a “before and after” in worries over Europe’s banks, said Jose Manuel Gonzalez-Paramo, a Spaniard who sits on the European Central Bank’s powerful, six-member executive board.

“Where before there was practically just rumor and prejudice, now we have data that investors can use to reach their own conclusions,” Gonzalez-Paramo told Cadena Ser radio. “Taken as a whole, we think they show solidity and resistance capacity by European banks.”

The publication of the results, which found that the banks need to shore up their finances by only $4.5 billion, came at a “very fortunate” time when there already is a “sense of stabilization,” said Silvio Peruzzo, a eurozone economist at RBS in London.