BRUSSELS (Reuters) - It has been 11 days since the European Central Bank announced it was prepared to buy the debt of struggling euro zone countries in unlimited amounts to help bring down their borrowing costs.
In that time, the euro has gained nearly 4 percent against the dollar, the broadest European stock index is up nearly the same amount and yields on Spanish and Italian 10-year bonds have fallen by more than a percentage point.
A degree of optimism has taken root thanks to the ECB's promise of intervention as well as a decision by Germany's top court to approve Berlin's participation in the euro zone's permanent bailout fund, and a sense of progress towards a euro-zone 'banking union'.
But as anyone who has followed the debt crisis for the past 2-1/2 years knows, the proof of the pudding is in the eating. And in this case, no matter how desirable the dessert, it contains a mixture of ingredients that are already proving unpalatable for those tucking in.
Euro zone leaders have squandered the opportunities offered by previous lulls in the crisis and there is no guarantee that they won't find a way of doing the same again.
"There's less panic, but that doesn't mean there's any complacency," said one EU diplomat, while acknowledging that the risk of leaders sitting back or relaxing was not negligible.
"We have to avoid a repetition of the situation where we allow one good decision to lead everyone else not to take other decisions that would improve the situation further."
The first problem is Spain. While the country has admitted that its banks need help and up to 100 billion euros has been set aside to support the sector, Madrid remains reluctant to sign up to any broader or stricter bailout program.
Until it makes a request for assistance, and agrees to the conditions likely to be imposed by the European Commission, the ECB and the International Monetary Fund, the central bank can't step in to buy its bonds and keep borrowing costs down.
That uncertainty has already begun to rattle investors. Whereas 10-year bond yields fell from above 6.6 percent before the ECB's move to 5.6 percent late last week, they are now rising again, nearing six percent on Monday. <GVD/EUR>
Spain's predicament is made all the harder by Germany, the EU's biggest economy, the largest contributor to the euro zone's rescue fund and the most influential voice in the crisis.
German Finance Minister Wolfgang Schaeuble is not convinced Spain needs to ask for a full program, especially since the worst of the market pressure appears to have eased -- barely two months ago Spain's yields were a punishing 7.5 percent.
With Finland, Austria and other northern European states largely leaning the same way as Berlin, Spain has less incentive to take the plunge. The expectation remains that it will eventually do so, perhaps around the time of the next EU summit in mid-October, but until it does, the market will be agitated and yields could well drift higher still.
"The market is pondering whether or when Spain might require a bailout," said Rabobank rate strategist Richard McGuire. "The realization is dawning it might not be rushing."
Greece remains far deeper in the mire than Spain and is way off meeting debt reduction targets demanded as part of its bailout. The euro zone is going to have to find a way to keep that show on the road for at least some while longer or risk plunging the currency bloc into even deeper crisis.
"Even if in other ways the pieces are falling into place in tackling the crisis ... there is always Greece," a senior EU official said. "It remains a distinct problem and it can still have a contagion impact."
There is also a risk that the drive to cut debts in countries already in recession will eventually provoke a dramatic public backlash, in a way that has not materialized yet even if there are signs of growing civil discontent.
Over 150,000 Portuguese marched on Saturday against planned tax hikes that have shattered the consensus behind austerity imposed by an EU/IMF bailout, and tens of thousands more marched in Spain.
In policy terms, it is not just the immediate question of if or when Spain will seek a bailout, and whether Italy will follow suit, that is making the pudding hard to digest. Long-term plans to overhaul the euro zone also threaten to ruin the flavor.
This week, EU officials begin detailed discussions on the four-step process they have committed to as part of a redesign of economic and monetary union, the underpinning of the euro.
As well as plans for a 'banking union', the goal is to better coordinate fiscal and budgetary policy across the euro zone (a 'fiscal union'), work on establishing an 'economic union' that more close aligns labor and social policy and finally to arrive at a fully fledged 'political union'.
The European Commission set out its proposals on banking union last week, with the goal of giving the ECB responsibility for overseeing all 6,000 banks in the euro zone beginning in January 2013, with the process completed a year later.
But there are already concerns about that timeline being too ambitious and disagreements between member states and the European Commission about what follows afterwards.
The Commission wants to establish a pan-euro zone fund for resolving bad banks, with all countries paying in, and put in place a scheme to guarantee euro zone bank deposits.
Under its proposals, once the ECB has supervisory authority, the way will immediately be clear for the euro zone's permanent bailout fund to directly recapitalize banks. But that is apparently not how Germany sees the "sequencing".
Schaeuble and Joerg Asmussen, Germany's executive board member at the ECB, said at a meeting of EU finance ministers in Cyprus at the weekend that direct recapitalization was unlikely to be possible from early 2013, and raised questions about whether ECB oversight was sufficient to allow it.
"We have the declaration of heads of governments of the euro zone that European banking supervision is a necessary but not sufficient prerequisite," Schaeuble told reporters, with the emphasis on "not sufficient prerequisite".
That could mean the difference between early recapitalization of a struggling bank and a much-delayed process that allows time for financial markets to return to their former frenzied state.
The banking proposals, and particularly the ECB oversight aspect, were expected to be the first and simplest step towards a deepening and strengthening of economic and monetary union, a process even optimists expect to take a decade or more.
Instead it is likely that every element of banking union and the fiscal, economic and political union ambitions that follow, will be fought over at length and in detail.
Tied up within banking union are some of the most contentious issues underpinning the crisis. For example, a proper deposit-guarantee scheme across euro zone banks would involve a mutualization of risk, with each euro zone country effectively acting as a deposit backstop for the others.
That is the banking equivalent of a mutualization of debt, the very thing that Germany remains adamantly opposed to, at least until the time is right.
From Berlin's point of view, pooling of risk, whether via bank deposits or joint debt issuance, is the culmination of economic integration, not something to be tackled at the start.
"That's the end of the process, and we all know that. It's as sensitive as mutualized debt, so it comes at the very end," the EU official said. "It will be a long time before we get to the deposit guarantee debate."
In that regard, any sense that the 11 days since the ECB announced its conditional bond-buying program had somehow resolved the debt crisis would be misguided.
There may be less alarm in financial markets, but a complex and deeply contentious road lies ahead. When it comes to the pudding analogy, it could be a long time before those consuming it can comfortably declare it appetizing.
(Writing by Luke Baker, editing by Mike Peacock)