The publication of stress tests of European banks on 23 July will provide a clearer vision of the capacity of Europe’s financial industry to overcome a further crisis. However, the markets, which have been reassured by the austerity measures adopted in most European countries, have already begun to reinvest in the EU.

Is the end of the tunnel in sight? Today the markets are nervously awaiting this evening’s publication of stress tests that will allow them to evaluate the financial stability of banks in the European Union. If tests are deemed to be convincing and do not reveal too many skeletons in the cupboard, investors will be completely reassured.

Over the last few days, the sentiment of panic that prevailed over the last six months, leading the markets to attack the sovereign debt bonds of southern eurozone countries, appears to have abated. The rapid rise of the euro, which has recovered from two months of decline against the US dollar to the point where briefly passed over the $1.30 mark last Friday (since then it has been hovering at around $1.28 and $1.29, well above the low point of $1.19 reached in early June) is a sign of renewed optimism.

Even Moody’s downgrade of Irish government bonds on 22 July, which came hot on the heels of a 14-July downgrade of Portuguese debt, has failed to reignite the flames.

On Monday, the New York Times published a long article, which documents “how quickly investor psychology has changed.” Not only are investors not withdrawing from the eurozone, it appears they are returning – a fact reflected by Greece’s successful re-emergence on the debt markets with a 1.65 billion auction of six-month bonds on 13 July. The 4.65% rate of interest the Greek government will have to pay remains high, but it is barely more than the rate it had to offer two months ago, before the announcement of the country’s austerity package.

Spain, which had been threatened by contagion, also staged three well-subscribed bond sales in July. Bond auctions in Portugal and Italy were equally successful. As a consequence, the European Central Bank (ECB) has been able to cut back on its government bond purchases, after having mopped up 60 billion euros of sovereign debt: a sign that the situation is returning to normal.

In the wake of a 15-July vote in Slovakia which was the last member state to grant its approval, definitive confirmation of the launch of the European Financial Stability Facility (EFSF) has done much to restore calm on the markets. As Luxembourg’s Prime Minister and President of Eurogroup Jean-Claude Juncker explained to Libération, “Now we have a drawer with the necessary instruments of torture that will enable us to intervene if the markets decide to attack another eurozone country.” The special purpose vehicle has the capacity to borrow 440 billion euros that could be boosted by a further 60 billion raised by the Commission, which makes it an effective deterrent.

Investors have also been reassured by austerity packages adopted by member states intent on cleaning up their public finances. And we are now beginning to see signs of the impact of the plan deployed by Greece, which is the most draconian of these: the IMF and the Commission have both emphasized the “considerable progress” made by Athens, which has succeeded in slashing its deficit: the figure for the first half of this year is down by 50% when compared to the first half of 2009. And Wednesday’s announcement of a Franco-German position that advocates major reinforcement of the Stability and Growth Pact will certainly contribute to the expectation of a resurgence of German-style stability culture.

Finally, one further element has made the eurozone appear more attractive: worries over a slowdown in American growth, which have prompted fears of a fresh downturn. With news that a number of American states including Illinois, California, Ohio, Michigan, Florida and New Jersey are on the brink of bankruptcy, the markets have come to the realisation that the budgetary situation in the United States (and also in the United Kingdom) is worse than it is in Greece or Spain. And this has been highlighted by recent paper published by the Bank for International Settlements, which indicates that over the next 30 years sovereign debt in both of these countries could reach unsustainable levels even if austerity packages are implemented (depending on the scenario, between 300 and 500% of GDP in the UK, and between 200% to 430% of GDP in the United States).

That said, the markets remain on a war footing – a fact reflected by the rates for risk insurance on credit default swaps for the sovereign bonds of several countries in the eurozone. The high premiums demanded for Greece, Ireland, Spain and Portugal show that investors believe that sovereign default may still occur. As the chief economist for France at Barclay’s Capital Laurence Boone remarks “It will take three years for the sovereign debt crisis to abate fully” during which time the EFSF will remain in operation. In the meantime, the markets will scrutinize the 2011 member state budgets when they are made public in the autumn: Boone warns that these “will need to demonstrate an ongoing commitment to austerity, and to avoid surprises.”