The American Interest
Analysis by Walter Russell Mead & Staff
Is Europe on the Mend? Probably Not.

The Financial Times has some good news for the Eurozone: the ratings group Fitch announced that U.S. banks have increased their exposure to the EU for the fifth straight month as of last November, with investment up by 8 percent month-over-month. German banks were the greatest beneficiaries, but even French borrowers got some love. So things are all good in the Eurozone?

Not quite. A ways further down in the article, the FT provides some needed context:

However, while the figures from Fitch show a steady rise in exposure to eurozone banks in recent months, the overall amount US money markets funds have allocated to the region’s financial institutions is still 60 per cent below the peak.

At the end of May 2011 US money markets funds held 30.6 per cent of their overall holdings in eurozone banks versus 13.7 per cent at the end of November 2012.

So while these green shoots are heartening, there’s still quite a ways to go before we can categorize this as any sort of sustained recovery in investor confidence. None of the systemic problems plaguing the EU have been properly addressed, much less solved. This mild correction may be the result of braver investors judging that the doom-and-gloom over Europe’s fate may be overstated, and a reaction also to the European Central Bank’s commitment to suck up all the debt paper the weak euro states need to print. But this is going to be a tough political year for optimists, with potentially game-changing elections in Italy and Germany on the horizon. And many investors will be watching France, where the erratic policy of the Socialist government and continuing gloom over economic prospects make for a genuinely dangerous situation.

Published on January 4, 2013 12:00 pm