BRUSSELS (Reuters) - There are no calls for celebration, no desire to relax in the corridors of Brussels but some officials believe the euro zone has turned a corner, sharpening the focus on longer-term reforms and structures.
Despite a messy bailout of Cyprus, markets are calm, Ireland's rescue programme is on track and Greece and Portugal, while still in recession, hope for a slow recovery next year.
Slovenia's banks are a concern, but one that policymakers are confident they can deal with. And although Malta's banking system is vast compared with its economy, it is not structured in the same way as in Cyprus. The same goes for Luxembourg.
Spain's bank restructuring appears to be working.
"All the skeletons are out of the closet," said one senior official who has spent much of the past three years working on the crisis. "There are no more major issues in the pipeline."
It is a line of thinking shared by European Central Bank policymaker Yves Mersch, who said on Wednesday he did not expect another country to "slump further".
The relative calm has given officials in Brussels breathing space, and the signs are that several countries, including France and Spain, could be given an extra year or two to meet their budget deficit goals. The policy of austerity remains, but the pace of fiscal consolidation will ease.
Yet none of that means the bigger issues underpinning the crisis are resolved. While the existential threat may have passed, the need to implement tough and unpopular structural reforms remains, and plans for tighter oversight and control of banks via a 'banking union' are not even half-way there.
"With Cyprus, we have hit the lowest trough of the crisis," said Peterson's Jacob Kirkegaard of the Peterson Institute for International Economics, a think tank in Washington.
"Although we might be down here for a little while longer, due to risks of an aggravated euro-area credit crunch, there is light at the end of the tunnel. Cyprus is now focusing minds on the structural repair of the euro area, such as banking union."
Although the renewed confidence is principally down to the European Central Bank's promise to support the single currency whatever it takes, it has allowed Brussels to soften the orthodoxy of budget austerity - despite the misgivings of Germany.
"The pace of fiscal consolidation is now slowing down in Europe," Olli Rehn, the European commissioner for economic affairs, told the European Parliament on Thursday. "We have the room to make fiscal policy with a more medium-term view."
Other taboos are being broken. In the bailout of Cyprus, losses were forced on large bank depositors, opening the way for a similar approach elsewhere. The power to impose such losses will be written into EU law, reducing the risk that taxpayers will have to foot the bill.
"The one thing that Cyprus did was to partially remove the direct linkage between the sovereign and the banks by bailing in the depositors and bondholders," said Tony Stringer, a government debt analyst with credit-rating agency Fitch.
But the euro zone has to keep a delicate balance. On Thursday, Rehn said structural changes were in part responsible for affording the euro zone extra flexibility, but he underscored the importance of sticking to promised reforms.
"The banking union is essential to reverse the process of financial fragmentation in Europe," he said.
If it unravels, confidence could just as rapidly disappear.
Many dangers lie ahead. First off, most member states still have to fully implement tough reforms to rehabilitate their economies by raising productivity, cutting labour costs and overhauling their pension systems, even as they are dropping deeper into recession.
That painful process of reform is going to take years to complete, with the risk that it will be rejected by voters.
Secondly, the botched initial attempt to impose losses on small savers in Cyprus could gradually erode confidence, prompting depositors to withdraw money if they fear a similar "bail-in" elsewhere.
"There is clearly a risk that when you make a proposal that insured deposits can be bailed in, you have let the genie out of the bottle," said Stringer. "It is then difficult to convince people that this option will never be considered."
Thirdly, the controls on capital movement in Cyprus have cast a cloud of uncertainty over Europe.
"If you cannot access or transfer euros in Cyprus, it will call into question whether there is a fragmentation of the currency," said Stringer. "It's difficult to argue that a euro in Cyprus is the same as a euro in Germany."
But perhaps the biggest risk, as in the past, is that Europe's political will to change could falter. That is especially true when it comes to establish a banking union, including ECB supervision as well as an agency and fund to close bad banks. It is a concern at the forefront of officials' minds.
As the sense of crisis has eased, Berlin has cooled to the idea for fear that it could be left on the hook for reckless lending in other countries. Without German support, the whole scheme will falter.
Finance Minister Wolfgang Schaeuble put a brake on plans in mid-April when he said banking union needed a change to the EU treaty, a cumbersome process most member states want to avoid.
Yet despite those concerns, and in contrast to earlier chapters of the financial crisis, financial markets remain calm.
Borrowing costs in Ireland, where yields on the government's 10-year bonds shot above 8 percent before the country was bailed out in November 2011, are now down to 3.8 percent.
Benchmark yields in Italy and Spain are also far below their peaks, indicating a much lower level of perceived risk by investors, despite the continued political uncertainty in Italy and the possibility that Spain may need further support.
Another sign of confidence is that banks in southern Europe rely less on the ECB for funding, according to central bank data. That trend continued after the Cyprus bailout, signalling that they are finding it easier to raise funding normally.
"The lack of market reaction illustrates that investors are convinced that the euro isn't going to break up," said Kirkegaard of the Peterson Institute.
Over the longer term, as Europe wallows in recession and voter resentment hardens, however, the mood could darken.
"Forecasts for economic recovery, including our own, keep on getting pushed back," said Fitch's Stringer. "First it was 2011, now 2012 and then 2013. The big worry is that Europe will suffer a lost decade, as Japan has done."
Francesco Papadia, the former head of the European Central Bank's financial market operations and one of the inner circle around former ECB President Jean-Claude Trichet, understands the risks in the delicate balancing act to sustain confidence.
"The mess in Cyprus was horrible," he said. "I'm surprised that the market has taken ... events so much in its stride.
"But if Italy says we'll run our own finances not Brussels or Merkel says forget about banking union, for example, then tensions could come back with a vengeance."
Additional reporting by Luke Baker. Editing by Mike Peacock