* European mood lightens largely thanks to ECB plan
* Euro zone also tackling banking, budget problems
* Growing German optimism surprises U.S. strategist
By Luke Baker
BRUSSELS, Sept 10 At a private Brussels dinner for European Union dignitaries last week, each table was named after a fearsome figure from the cinema or fiction: Godzilla, Darth Vader, Lord Voldemort and Doctor No were among the settings.
Bruegel, the economic think-tank hosting the event, subtitled the evening "Frightening Times" in a reminder to guests of the scary moments that the European debt crisis has thrown up over the past 2-1/2 years.
But far from being depressed or downbeat, the mood was cautiously optimistic, thanks largely to a European Central Bank decision a few hours earlier backing its promise to do "whatever it takes to preserve the euro" with a new bond-buying programme.
As guests including French Finance Minister Pierre Moscovici and former ECB chief Jean-Claude Trichet sipped aperitifs, all the talk was of the ECB's offer of help for the likes of Spain and Italy, whose borrowing costs have risen to punishing levels.
While no one in Brussels is declaring the crisis over, there is a sense that the painstaking effort to suppress a crisis that began in Greece in January 2010 is beginning to pay off.
"There's a more fundamental discussion now going on about how do we fix economic and monetary union and where do we go from here," said Guntram Wolff, Bruegel's deputy director, underlining how policymakers were moving on from quick-fixes.
"The ECB has helped, for sure. But it's more that there is now a sense that the big pieces are on the table for discussion. We're dealing with banking union, with fiscal union and really beginning to get to the heart of the issue."
Policymakers assembled by Bruegel last Thursday broadly felt that the ECB - by saying it would buy the debt of distressed euro zone members as long they request EU aid and meet strict conditions - had taken a bold and potentially radical step.
This could help to ease the crisis although, as ever, everything depends on countries living up to the commitments made in return for help from the euro zone's bailout funds.
This is not the first time the ECB has taken extraordinary measures to tackle the crisis. In a process started last December and repeated last February, it issued one trillion euros of short-term, low-interest loans. Yet that only managed to stall the euro zone's problems for a couple of months before government bond yields rose to new highs again.
This time the optimism appears stronger. Rather than constantly having to come up with knee-jerk solutions in response to financial market pressure, policymakers now have more time to examine the roots of the problem and try to tackle the structural problems underlying the crisis.
STEP BY STEP
Later this week, the European Commission will present proposals for overhauling supervision of the euro zone's 6,000 banks, with plans for the ECB to be given primary responsibility for monitoring the sector. In time, there are plans for a fund to help wind-up bad banks and there will be deposit guarantees.
Once steps towards a banking union are in place, euro zone leaders will begin discussing closer fiscal coordination and efforts to align budgetary policies, aiming to strengthen the underpinnings of the single currency.
There will also be debate about changing EU treaties to tighten monetary union and define better how sovereignty is pooled among member states. This will be a long and complex process, but many leaders now acknowledge that it's necessary.
Steven Englander, the global head of foreign exchange strategy at U.S. bank Citi, has found himself surprised by the growing optimism in Germany and elsewhere.
New York-based Englander, who is touring Europe, noted that ECB President Mario Draghi had won backing from German Chancellor Angela Merkel and her Finance Minister Wolfgang Schaeuble, despite opposition from the country's central bank.
"Meeting German investors before the ECB meeting, I was struck how optimistic they were with respect to the euro, even when they had been quite negative a few months ago," he wrote in a note to clients on Sunday.
"The game-changer for them was the support of Chancellor Merkel and Finance Minister Schaeuble for the ECB programme, and Draghi's assertiveness, which had isolated the Bundesbank."
Expectations that Germany's Constitutional Court will on Wednesday rule in favour of the euro zone's permanent bailout fund has created some light at the end of tunnel, as it would remove the last obstacle to the mechanism coming into force.
While all this keeps up the crisis-fighting momentum, no one is pretending for a second that an end is in sight. Experience shows the euro zone has a remarkable capacity to throw up obstacles that can plunge the crisis back into its depths.
Sentiment could turn negative in an instant if Spain doesn't request help or doesn't meet conditions imposed on it.
Greece, where the mayhem began, also remains an all-but-intractable problem, with debts that may need to be restructured again. Should anyone have forgotten that, two tables at the Bruegel dinner were named Scylla and Charybdis - both terrifying sea monsters of Greek mythology.