Prospects for the European economy seem more positive now than this time last year. The worst fears of a destructive “domino effect” that might have resulted from Greece or another country being forced out of the euro-zone have failed to materialise. The effects of the financial crises were largely contained within the most afflicted economies of southern Europe. The countries of central and north-western Europe, while experiencing higher than normal levels of economic volatility, have so far managed to weather the storm. Their relative stability has prevented the effects of the financial crises from trickling down throughout Europe. In recent months, several economic indicators in the EU, such as the Economic Sentiment Indicator and the Construction Confidence Index, have improved (see Charts 1 and 2). There is cautious optimism that economic reforms in the most troubled EU countries are beginning to work.
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