Euro action gives Spain and Italy breathing space

Spanish protesters
Image caption The Spanish government has had to introduce drastic spending cuts that have proved deeply unpopular among the people

Over the summer holidays, while many of us have been in Spain or Italy soaking up the rays and the vino, something radical seems to have happened to the Spanish and Italian economies.

With no-one noticing, they must have had a massive spurt of economic growth, become much more efficient, cut their public spending or raised billions in new taxes. Or possibly they have done all four.

How else is it possible to explain the fact that, after lurching from crisis to crisis for years, all of sudden the financial markets seem to have decided to lend the Treasuries in Rome and Madrid billions of euros at massively cheaper rates?

Because that is exactly what has happened. Just three months ago, Spain was paying 7.5% to borrow money for 10 years on the bond market, but on Friday morning, the rate was 5.3%. For Italy, the rate has fallen from more than 6.5% to about 4.75%.

The fall in the cost of borrowing suggests that the world of international finance is much more relaxed about lending further hundreds of billions to two countries that, until a few months ago, were seen as the sick men of Europe - just days away from needing bailouts that would have dwarfed those given to Greece and Ireland.

'Make my day'

So what has changed? If you were lucky enough to be in Spain or Italy over the summer, it would have been fairly obvious that things were pretty much the same.

You will not have seen long lines of Italians or Spaniards happily queuing outside the tax office to contribute more to the government's coffers. Nor is it likely that you saw the beaches empty as the locals headed back to work, eager to put in some serious overtime.

Image caption Tough talk from the ECB head Mario Draghi helped to calm market nerves

Instead, what seems to have changed is that the EU's various branches have started giving the impression that they are taking the eurozone's crisis seriously.

In July, Mario Draghi, the head of the European Central Bank, told a conference in London: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

It was not exactly Clint Eastwood staring into the camera and saying "make my day" - and Mr Draghi and numerous other people had said much the same numerous times before. But this time, it seemed to work.

Mr Draghi was threatening to use the ECB's almost bottomless coffers to intervene directly in the market and buy bonds, thus forcing down Italian and Spanish borrowing costs. In September, he announced the details of how that would work if the ECB were asked to intervene.

So far, he hasn't had to do any such thing, as the threat was enough to drive bond yields down anyway. But on its own, that would probably not have worked.

Worrying prospect

No, the markets have also seen more convincing and co-ordinated policies from the EU, culminating last night with an agreement in principle to move towards a single banking regulator for the eurozone.

That would in turn allow countries like Spain to have their banks bailed out directly by an EU fund, rather than having to do it themselves.

Image caption Chancellor Angela Merkel faces an election next year

Now none of this has happened yet, of course. The EU will be moving with unusual haste if the banking union is up and running in two years, not least because German Chancellor Angela Merkel knows German voters dislike the idea and she has an election to win next year.

But the EU does seem to be putting in place a structure that might work - to regulate banks and prop up failing ones, reduce government borrowing costs and even bail out Greece, again.

That is why the borrowing costs for Spain and Italy have fallen so sharply in recent months, rather than because of any radical reversal in economic fortune achieved by the countries themselves.

Which leaves a worrying prospect, because there is very little to stop the markets getting nervous all over again. Almost anything could set them off - a deterioration in the economic prospects of Spain or Italy, another bank collapse or even a political stumble by any of a dozen EU leaders and the eurozone crisis could easily start to heat up once again.

The first sign of that happening is likely to be a sharp rise in those Spanish and Italian bond yields. Now is not the time to rest on laurels or take your eye off the market.