Eurozone crisis: Why it may not be over yet

Apparently, global investors are having second thoughts about the eurozone crisis. They've decided it might not be over, after all.

Well, tell us something we didn't know, I'm tempted to say on behalf of many economists.

For them, the surprising thing about the past few weeks or so is not that the mood of calm in European financial markets appears to be ending, but that it lasted as long as it did.

A trillion euros is a lot of money. Even in today's many-zeroed world. The European Central Bank could reasonably expect to get quite a lot of market tranquillity in exchange for all the cheap loans it has doled out to European Banks since the end of last year.

But, as I and others have pointed out many times, the worries about bank funding are only one piece of the eurozone crisis. They are also the easiest to fix.

In addition, Europe's leaders have to worry about the state of the public finances in the periphery economies: particularly Spain and Italy but also, increasingly, France. And they have to find a way to revive the real economy.

What the financial markets have apparently remembered in the past few days is that, by itself, the official solution to the sovereign debt problem (more and more austerity) makes the real economy problem even worse, at least in the short run. Reading recent press reports, they also seem to have discovered that savage spending cuts and tax rises can make governments really unpopular. Who knew?

Ok. I am being a little facetious. Financial markets aren't stupid - or not always. Investors knew there were a few holes in the programme to rescue the eurozone, and that there wasn't a lot of room in that new fiscal convergence treaty for stimulating growth.

In their hearts, I'm pretty sure that investors also knew that you couldn't get rid of economic problems that have built up over years by simply using the word "technocratic" a lot, and throwing money at the banks.

But for all that, I think there was a hope that with a fair wind, and some decent growth in the US and the core eurozone economies, European leaders would squeak by without another major eruption - in Spain or anywhere else.

That is still possible. But it's looking less likely than before, for two reasons.

One is economics. All that official lending for the banks has almost certainly prevented a major seizing up of the financial markets which would have been terrible news for ordinary borrowers. As we know, the cheap money has also eased funding issues for governments, as periphery banks buy their own government's bonds.

But, interestingly, there is NOT much sign that banks from other parts of Europe or the world's institutional investors have gone back to buying sovereign debt in a big way. The latest figures, for February, show that sovereign holdings by German banks, for example, have fallen slightly since November, while holdings by Spanish banks have risen by 68bn euros (£56bn; $89bn).

Nor is there much sign that the cheap liquidity, or the cuts in the official ECB policy rate, have filtered through to households and companies in the countries that need it most. As Marchel Alexandrovich from Jefferies, has pointed out, mortgage rates in Spain and Portugal are higher now than they were at the start of 2011 - half a percentage point higher in the case of Portugal, despite ECB rate cuts.

Outside the financial sector, companies are also paying more to borrow in these countries: borrowing costs for ordinary businesses have risen by 1.4 percentage points in Portugal and 0.8 percentage points in Italy.

It's really too soon to judge the full effect of the ECB's actions on the amount of credit flowing through these economies. Monetary policy takes time to feed through to the real economy, at the best of times. But we can say they haven't seen much of an upside yet.

Talk of further rounds of fiscal austerity in Spain and the others does not help the situation. Nor do the latest jitters about the US economy - and China. (Though, when it comes to the US, the fundamentals do look better than they did this time last year, when the strength seen in the first few months of 2011 started to evaporate.)

The second reason why the "squeak by" scenario for the eurozone now looks more difficult is a sudden outbreak of politics.

I say sudden. It's not exactly news that France and Greece are about to have important elections. But it is scary, for international investors. Or ought to be, when so few of the ingredients of a lasting solution to the Eurozone crisis are in place.

Like it or not, the Greek election, which we now know will happen on 6 May, will revive questions about whether Greece can stick with its new programme - or, indeed, the euro. But the election in France on the same day could prove more consequential.

Why? Because a victory for Francois Hollande in France would re-open the entire debate about austerity and growth, right at the heart of Europe.

The very phrase, President Hollande, could also (whisper it softly) cause investors to wonder whether France - the country with by far the highest government spending as a share of GDP in the eurozone - deserved to be borrowing at less than 3%.

We know what Nicolas Sarkozy thinks about fiscal austerity: he's in favour, at least when it comes to countries that aren't France. It's harder to predict where M Hollande will stand the next time that Spain decides to revise its deficit targets. Or what the German Chancellor will say in response.

We do know how investors are likely to react in the face of further arguments about the future direction of the eurozone, not to mention to further downward revisions to most European economic forecasts.

All of which is to say, those crazy financial markets may be on to something. I don't think the eurozone crisis is over, either. Spring fever in the eurozone