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How Europe might muddle through

(MoneyWatch) Even as many experts predict the demise of the eurozone, the European Union so far has found a way to keep a lid on the crisis. Whether European governments can eventually restore the currency union to health remains unclear. But while the path to stability is unsure and politically complex, the EU may find ways to edge away from the precipice toward a solution.

Here's a look at how Europe might continue to muddle its way to, if not renewed prosperity, then at least relative financial security:

The European Central Bank starts printing money and buying bonds. Many economists agree that the most effective remedy for Europe's debt crisis would be to allow the ECB to use its money-printing powers to buy the bonds of troubled nations.

Despite the opposition of Germany and other creditor nations to such a plan, rising European stock and bond prices in recent weeks suggest that investors are betting that eurozone members are gradually warming to this remedy. That will not be easy, however. Along with overcoming resistance from the region's healthier nations, EU laws will have to be revamped, a politically dicey proposition.

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Spain doesn't ask for a bailout. A massive infusion of capital courtesy of other eurozone members and international lender could hurt Spain more than help. For one thing, a bailout is not certain to revive the country's tottering banking sector, eliminate its huge regional government debt, reduce soaring unemployment, and prevent capital flight. Consider what has happened in Greece. Also, while the roughly 7 percent interest the Spanish government must pay on its debt is worrisome, such yields may not be the death knell they were for Greece, Ireland and Portugal. As Megan Greene writes in The Guardian

There is no magic number above which borrowing becomes unsustainable. In theory a country could survive if it made a bigger fiscal adjustment so that it had more money to pay down its debt. Spain is not in the same position as the other bailed-out countries because it is nowhere close to running out of cash. It has a long average debt maturity, so its debt will not be raised at such high rates all at once. If Spain can continue to cut spending without massive civil unrest, it might very well be able to continue to borrow its way through.

Meanwhile, Spain's ability to keep borrowing could take pressure off Italy, allowing it to continue borrowing at sustainable interest rates. Over time, this recognition that Europe's larger economies are not as financially vulnerable as the region's most batter economies could stem investor anxiety, further easing borrowing.

Spain and Italy's debt load may not be terminal. Economist William R. Cline, who has decades of experience with sovereign-debt crises, writes in a recent working paper examining the debt loads of Spain and Italy that he doesn't see the countries going bust.

Modeling for different possible economic outcomes, his baseline scenario projects that recapitalizing Spain's banks would add only $6.22 billion to the government's debt. This assumes that the eurozone's rescue fund, the European Stability Mechanism, takes direct stakes in the lenders rather than routing the money through the government.

Even under the worst-case scenario, the bank bailouts would add only $62 billion to the nation's debt, Cline projects, far less than a lot of estimates now being floated. That would leave Spain with a manageable debt load of 92 percent of GDP by 2020, Cline said. As he recently told The Wall Street Journal, "The good outcome depends on Spain doing its part on the primary surplus and the eurozone doing its part on the banking union.

Of course, Cline's economic scenarios may be too optimistic. All of them use assumptions that many analysts doubt will come to pass. Yet many of these same analysts had also previously predicted that the eurozone was doomed to fall. In reality, it still has time to back away from the cliff.