Euro zone crisis: has a corner been turned?

There is probably no riskier form of behavior for a blogging journalist than to claim that a corner has been turned in solving the euro zone's debt crisis but two weeks into the New Year it feels like something has changed – and changed for the better.

It may be a moment akin to something in an episode of ER where the patient is in the emergency room and the crash carts have been deployed and vital signs have stabilized and the family – you and me and everybody in the world who understands that a euro crash will mean Great Depression MkII – are taking a deep breath, sipping tepid coffee, and feeling tentatively hopeful that the patient will make it.

But I think something has definitely changed. It isn't simple facts like the results of yesterday's successful auctions of Spanish and Italian 10-year bonds. Or the modest devaluation of the euro – which gives hope that exports can lead to growth.

What's changed is actually beyond hard economic data.

It has to do with people – three people actually – all of them Italian.

Think back 90 days. EU leaders are dealing with managing the Greek debt crisis. Their concern is that debt contagion will spread to Italy. The euro zone's third biggest economy currently has debts equal to 120 percent of GDP and a massive pile of bonds coming due in 2012. Where will it find the money to pay? The bond markets are driving up the price of Italian bonds to unsustainable levels.

Italy is led by Silvio Berlusconi, a man so far out of his depth it would be laughable if the situation wasn't so dangerous. He clings to power. Italian bond yields go up. He insults German Chancellor Angela Merkel in the crudest, most sexist terms, destroying their already fragile working relationship. Bond yields go up. He attends summits and ogles female national leaders, seems to doze off. Bond yields go up.

By the time Berlusconi resigns on November 12, the crisis is super heated.

But by then another Italian, Mario Draghi, has taken over as president of the European Central Bank. He immediately reverses his predecessor's big mistake – raising interest rates – and cuts them. Cheers all around. But, to the dismay of many he refuses to use the ECB to print money or act as lender of last resort to indebted euro zone governments. The bank's charter doesn't give him that authority, he says. Think of him as a strict constructionalist when it comes to the bank's constitution.

The crisis remains white hot. Then just before Christmas, Draghi announces a three-year low-interest loan deal for euro zone retail banks. Borrow now, take three years to repay, interest rate of 1 percent guaranteed. Around 500 banks borrow nearly half a trillion euros.

It was seen at the time as a clever way to get around the ECB's constitutional restrictions on being "lender of last resort." The retail banks could lend the money to businesses, buy their government's bonds – whatever.

Then came the holidays. Things calmed down anyway but during this period a third Italian began to emerge as a player.

Mario Monti, the technocrat appointed to replace Berlusconi, has already brought changes to the way Italy's economy is organized. More important he has clearly been repairing the relationships so badly damaged by Berlusconi. Europe's big two, Merkel and French President Nicolas Sarkozy, have held summits with Monti. They like him – next week the trio will have a summit in Rome – and are beginning to change the tone of their public statements.  At a press conference following her meeting with Monti earlier this week, Merkel who has spoken only of austerity and discipline, sang the song of growth, echoing what Monti has been saying since taking office. 

Meanwhile, Draghi's loan program seems to be working. He made that clear at a press conference yesterday. The successful Italian and Spanish bond auction yesterday is proof. Yields on their 10-year bonds are coming down.

In the feverish atmosphere of last October it was possible to lose sight of the social and political aspects of this crisis. The EU is a political and social confederation as well as an economic one. It works best when the political leaders of its biggest countries get on well. That is something many generalist American commentators unfamiliar with the dynamics of the EU failed to understand in their rush to bury the euro.  Economic commentators focused on hard data miss the human dimension in the crisis as well.

Berlusconi's departure and Draghi and Monti's arrival has dramatically altered the social and political shape of the situation.  Monti, brings change because he approaches his job with the seriousness the situation requires. Draghi, because he clearly knows his own mind and will withstand pressures from markets and governments to walk the path of short-term expediency.

Today, even Angela Merkel is singing the song of growth

Of course, it could all go south. The EU still has to figure out how to make the new fiscal compact – with its harsh rules on budget deficits – work. Binding agreement has been promised by March. The markets seem to be giving EU leaders time to dot their i's and cross their t's as they finalize the rules for the new compact.  It could be the players in the bond markets have used their Christmas holiday to reflect on what a break-up of the euro will mean for the global economy over the next decade and have decided not to force the issue right now. The gloves may come off in March if the EU fails.  The crisis could heat up again quickly.

To pick up the ER metaphor again: It is still possible the patient will require the crash cart again. It could pick up an infection from somewhere else – a dramatic slow down in the Chinese economy, for example. Italians might emulate the Greeks and violently rebel against the austerity measures they are being forced to endure, or simply carry on finding creative ways to avoid paying their taxes.

But as of this morning I don't think that will happen. The crisis has a long way to run but when the history is written I think historians will look back at the Italian autumn as an important turning point.