Why European Debt Jitters Aren't So Extreme This Time

At the start of the year, rumblings coming out of Europe's overly indebted Southern countries were all it took to have investors rushing for the doors. High-profile economists had warned that the bloody crisis in the private financial sector had morphed into a sovereign debt crisis, and investors bolted at any signs the dominos were starting to fall.

While markets then understandably shot first and asked questions later given the potential for dire outcomes, investor nerves seem far calmer now. Why the change? A surprising swing from an almost assured double-dip recession in the eurozone to robust growth during the intervening months has played a major role in easing the mood.

Europe's problems have hardly vanished, of course, and the complexities of managing so many varied economies under one roof remain as perplexing as ever. The latest bout of jitters emerged when the German Banking Association said on Tuesday that the country's 10 largest bank may need to raise an additional $135 billion (105 billion euros) in funding in part because of exposure to shaky sovereign debt.

Down but Hardly Rocked

The latest dive in risk appetite hit struggling credit markets hard in Europe's periphery. Greek, Portuguese and Irish government bonds tumbled with spreads widening to record levels compared to similar German bonds. (Investors should note that the rock-bottom yields on German bonds that investors seeking safetly are now lapping up also helps widen the yield spreads.)

The tumult across the Atlantic took a toll on U.S. stocks, which slid on the first day after the Labor Day holiday following last week's strong rally. But it hardly rocked the market the way it would have when Europe's broader economy was considered to be on the brink -- and many analyst questioned the viability of the euro itself.

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Europe's sovereign credit condition seems to have gone from potentially fatal to merely chronic over that time frame. "I think the European sovereign debt issue is one of those issues that the market will focus on and then turn away from, and then focus on and turn away from, probably for years not months," Credit Suisse U.S. equity strategist Doug Cliggott told the Financial Times.

The startling European economic turnaround is helping contain the financial jitters. In January, a double-dip recession was a foregone conclusion among many market participants when it came to the Continent's highly regulated, taxed and unionized economy. But the region posted a surprising rebound in the second quarter, expanding instead at 2% -- the fastest pace in four years.

Europe Will Be Europe

The powerhouse German economy, Europe's centerpiece, posted a record quarter fueled by exports to booming Asian markets, even though signs are mounting that a cooling may be in the works.

Paying attention to the macroeconomic backdrop rather than day-to-day financial machinations may be the key for investors. Major swings in risk preference and national prospects will linger for as long as Europe remains Europe. But those swings will likely be kept at bay if the European economy keeps on chugging.