Europe has won the immediate battle to save the euro, but the war to make the single currency sustainable in the long run has only just begun.
Relief in Brussels is palpable: the European Central Bank's conditional promise to act as buyer of last resort for the bonds of troubled euro zone members has removed an existential threat, at least for the time being.
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And crucially, some northern countries that had previously paid only lip service to the impossibility of a euro break-up now mean what they say, according to officials.
As a result, the 17 countries sharing the single currency have gone into overdrive to build the supporting institutions that should have been in place soon after the euro was launched in 1999.
The euro zone now has a permanent rescue fund. An embryonic banking union to break the death clinch between highly indebted sovereigns and banks is being formed. There is even talk of a separate budget for the euro zone to cushion economic blows.
"There's lots of progress that you couldn't have imagined politically two years. Things are moving fast," said Diego Valiante, a researcher with the Center for European Policy Studies, a think tank in Brussels.
Yet the new architecture may take a decade to complete and even then, the institutional pillars will not ensure the euro's long-term viability.
For that, growth and convergence are needed -- the reverse of the divergent north-south economic, fiscal and financial trends still balkanizing the euro zone and preventing the ECB from delivering a single monetary policy for the entire area.
A recent global survey of chief financial officers by BDO, an auditing and business services firm, showed a high degree of wariness about investing in southern Europe.
"The politicians have made a lot of promises, but delivery of those promises doesn't seem to have the confidence of CFOs yet," said Martin van Roekel, BDO's chief executive.
On some levels, debtor countries are making progress in rebalancing their economies, albeit at the cost of harsh austerity measures that have brought down governments, triggered violent protests and left much of Europe in recession.
Greece, Portugal and Spain all had current account deficits exceeding 10 percent of GDP in 2007. This year, only Greece's will top 3 percent. Not all the improvement is due to a collapse of imports. Spain's exports are up 23.6 percent since the fourth quarter of 2008, according to Deutsche Bank.
Assuming current trends persist, the gap in unit labor costs that opened between peripheral countries and Germany, the euro zone's anchor, might close in most cases by 2015-16, Deutsche economists Thomas Mayer and Markus Jaeger estimate.
Countries are also making headway in reducing their budget deficits. To better assess medium-term debt sustainability, Mayer and Jaeger take account of the fact that the euro zone is at the low point of the economic cycle, thus reducing tax revenues and boosting entitlement spending.
On this cyclically adjusted basis, in 2013 only Ireland will run a budget deficit of more than 3 percent of GDP, the euro zone threshold. Italy will be in surplus.
"Crudely assuming medium-term nominal GDP growth of more than 3 percent, the peripheral countries are close to reaching an underlying fiscal position consistent with the stabilization of the debt-to-GDP ratio," they wrote in a report.
But, as Deutsche Bank notes, economic growth has been disappointing. This is where the short-term relief in Brussels gives way to worries about the capacity of economies to reinvent themselves.
Take Spain, which is likely to have suffered a permanent loss of output due to the collapse of its construction sector after its housing bubble burst. Unemployment is at a record 25 percent and the economy has shrunk for five quarters in a row.
"At least five or 10 years of adjustment will be needed," a senior official at the European Commission, the EU's executive branch, said.
SMALL IS NOT PRODUCTIVE
There has been no shortage of reports down the years pinpointing how Europe can raise its game, from removing barriers to cross-border competition to building pan-European energy and transport networks.
Nevertheless, the labor productivity gap between the European Union and key competitors has widened in the past decade. Innovation capacity is poor -- the ���Where is Europe's Google?' question -- and even Chinese firms now spend more on research and development than EU companies.
Giles Merritt at the Friends of Europe, another Brussels research group, said the challenge posed by Asia had not yet sunk into the political debate: "The competitive alarm bell hasn't been rung loudly enough."
The size of firms is illustrative of the deep-seated reforms that academics advocate.
Research by Bruegel, a Brussels think tank, shows that large companies typically are much better exporters than small firms, thus contributing to their countries' competitiveness. Large businesses also invest more in human capital and R&D.
Yet regulations in many countries discourage expansion, Guntram Wolff, Bruegel's deputy director, said. A French company, for example, has to set up a works council once it has 50 employees.
"We know from our research that only big firms are really innovative and productive and are likely to export a lot," Wolff said. "You're not going to export to China with a firm of 49 people."
NEW BATTLES AHEAD
France is not alone. Italy, which also has rigid labor markets, has the worst productivity record of any member of the Organization for Economic Cooperation and Development, a 34-strong club of industrial democracies.
Italy's GDP per capita has been declining steadily since 1995. Its stagnation is priced in.
It is the more recent decline in the competitiveness of France, reflected in a record trade deficit of 70 billion euros in 2011, that is of increasing concern.
France is enjoying record low bond yields for now, but some investors are growing uneasy at the reluctance of President Francois Hollande to embrace reform.
The risk is that the economies of France and Germany will continue to diverge, driving a political wedge between Europe's core couple. While France's share of global trade has shrunk in recent years, Germany's has continued to grow.
"Germany has been seeing strong productivity gains, which is a trend that will continue as they keep investing. This is a problem for France because its productivity, although high, is stagnating," a senior international economist said.
The nervousness is shared by some officials in Brussels. They know they have earned only a respite the long war to save the euro. They are just crossing their fingers that when the truce ends, they will not face a big attack on the French front.
"France is on a pathway to become like Italy, with little sign of an appetite to reform and little incentive to do so as long as the markets continue to treat it kindly," one official said.
(Editing by Mike Peacock)