FRANKFURT, Germany -- The worst of Europe's financial crisis appears to be over.
European leaders have taken steps to ease the panic that has plagued the region for three turbulent years. Financial markets are no longer in a state of emergency over Europe's high government debts and weak banks. And this gives politicians from the 17 countries that use the euro breathing room to fix their remaining problems.
Threats remain in Greece and Spain, and Europe's economy is forecast to get worse before it gets better. But an imminent breakup of the euro now seems unlikely, analysts say.
"We are probably well beyond the worst," says Holger Schmieding, chief economist at Berenberg Bank in London. He says occasional flare-ups in financial markets are likely, but "coming waves of turmoil will be less severe."
Evidence that Europe has turned a corner can be found in countries' falling borrowing costs, rising stock markets and a slow but steady stabilization of the region's banking system:
-- The interest rates investors are demanding to lend to struggling countries such as Spain and Italy have plunged -- a sign that investors are less fearful about defaults. Spain's two-year bonds carry an interest rate, or yield, of just under 3 percent -- down from a July 24 peak of 6.6 percent. Italy's bond yields have dropped just as sharply.
-- The Stoxx 50 index of leading European shares has surged 26 percent since June 1, while the euro has risen from $1.26 to $1.29 over the same period.
-- After months of withdrawals, deposits are trickling back into Greek and Spanish banks, signaling that fears of their imminent financial collapse are abating. And U.S. money market mutual funds loaned 16 percent more to eurozone banks in September. That was the third straight monthly increase in short-term funding to European banks, and follows a 70 percent reduction since May 2011.
More proof the crisis is easing: Gatherings of European financial ministers no longer cause global stock and bond markets to gyrate with every sign of progress or a setback.
As financial-market panic recedes, euro leaders have more time to try to fix the flaws in their currency union. Among the challenges are reducing regulations and other costs for businesses in order to stimulate economic growth, and imposing more centralized authority over budgets to prevent countries from ever again spending beyond their means. That's important because a major cause of the crisis was Greece's overspending during the calm years after the euro's introduction in 1999, and Italy's failure to cut the high levels of debt it joined with. Other governments -- such as Spain and Ireland -- were saddled with debt piled up by banks and real estate developers during boom years.
Much of the credit for easing Europe's financial crisis goes to the European Central Bank, which has become more aggressive over the past year under the leadership of Mario Draghi.
The ECB said Sept. 6 that it was willing to buy unlimited amounts of government bonds issued by countries struggling to pay their debts. The ECB's pledge instantly lowered borrowing costs for Spain and Italy, which earlier in the year had faced the same kinds of financial pressures that forced Ireland, Greece and Spain to seek bailouts.
"Financial market confidence has visibly improved," Draghi said Thursday during a press conference.
German Chancellor Angela Merkel has also helped ease financial tensions across the region by speaking more forcefully about the need to hold the euro together.
Merkel's support is critical because Germany, the eurozone's largest economy, has the most at stake financially in any bailouts. Merkel has backed the ECB's bond-buying plan and has made conciliatory statements toward Greece. That has paved the way for the so-called troika of international lenders -- the ECB, the European Union and the International Monetary Fund -- to allow Greece more time to meet deficit-reduction targets. The Greek Parliament took a big step Wednesday toward securing its next batch of rescue loans from the troika by approving a new round of tax hikes and spending cuts.
Another key breakthrough in the financial crisis came in late June, when leaders meeting in Brussels took new steps to steady banks and governments. They agreed to ease up somewhat on austerity demands; to use bailout funds to buy government bonds and help ailing banks; and to create a single supervisor for all of Europe's banks.
Some analysts worry that as the financial pressure eases Europe's leaders could lose their recent momentum.
A breakup of the euro "is still possible," says Marie Diron, senior economic adviser to Ernst & Young. "I don't think we have removed the risk altogether."
Europe's leaders have big challenges left.
The most pressing is saving Greece. If the country was forced into a default and began printing its own currency, investors would assume other countries might go next and begin pulling their money out of those countries too, or demand higher returns to keep it there. The coming months could severely test Germany's new willingness to help. Despite two bailouts totaling (euro) 240 billion ($311.3 billion) since 2010, Greece needs an estimated (euro) 30 billion more from the other eurozone countries as its economy shrinks.
Berenberg's Schmieding thinks there's a 25 percent chance that Greece will leave the euro in the next six months, if its parliament balks at painful austerity measures and euro members are reluctant to provide more help. But he thinks a Greek departure would cause "only temporary damage." Other economists think it could break up the euro.
Another hot spot is Spain, the eurozone's fourth-largest economy. The country's debts are piling higher as its regional governments struggle and its economy shrinks. The ECB's offer two months ago to buy unlimited amounts of government bonds is a potential lifesaver, but the country's Prime Minister Mariano Rajoy needs to formally request such aid. He has held off, apparently hoping the current market calm will last and he won't suffer the political humiliation of taking a bailout. Analysts say that if he waits too long Spain's borrowing costs could rise again to unsustainable levels and reignite broader fears in financial markets.
Banks are another problem. Weakened by massive losses on the government bonds they bought and real estate loans that aren't being repaid, banks across the eurozone have been propped up by governments that are themselves struggling financially. Even with the help, these banks have been forced to reduce lending, which has hurt Europe's economy.
A banking supervisor for all of Europe could provide some relief, by forcing crippled banks to merge with healthier ones. But it will be the second half of next year, at the earliest, before the supervisor is in place, banking analysts say. European leaders disagree over how much authority to give the supervisor and how to fund it.
Economic growth is what would ultimately end Europe's crisis. But robust growth remains far off. The European Union forecast Wednesday that the 17-nation eurozone economy would grow just 0.1 percent in 2013.
Privately, European officials say the ECB's bond-buying plan has afforded them a crucial window of opportunity -- a year, perhaps -- to resolve their biggest challenges.
Much depends, they say, on what gets accomplished in that time.