LONDON What a difference a year makes.
A Reuters' annual investment outlook summit 12 months ago was abuzz with debate over whether the euro zone would still be in place by the end of 2012, at least with all 17 members.
After another roller-coaster year that has brought Spain to the forefront of the debt crisis, the currency bloc is rattled but still intact and break-up fears have taken a back seat for global chief investment officers.
Reassured by a series of EU deals, including a Greek package on Monday, investors are returning to euro zone assets, pushing Italian 10-year benchmark borrowing costs to their lowest in nearly two years and Spain's to the lowest since March.
The protracted debt crisis is still on everybody's mind, with "bouts of nervousness" expected in 2013, BNP Paribas Investment Partners CIO William de Vijlder told this year's summit, held this week. But he expected news flow on the euro zone next year to be much less intense, at least for Greece.
Chief investment officers and investment strategists participating in the summit widely expected the euro zone to be in place a year from now, with Greece still in. The U.S. fiscal cliff has now usurped Europe's debt crisis as the biggest tail risk.
That is largely thanks to European Central Bank chief Mario Draghi, said hedge fund star Michael Hintze.
Draghi pledged in July to do whatever it takes to save the euro and followed up in September with plans to buy the bonds of struggling euro zone states that request aid, offering a safety-net for Spain and Italy and triggering a rally in European shares.
"Draghi is very clever, he really knows how to play that game," said Hintze, founder of CQS fund.
Hintze still believes the risks of "mis-stepping along the way are very high" but says the ECB's bond-buying plans have bought time.
"What is clear to me is there is a political will to do something," Hintze said. "I think they are going to muddle forward."
Investors remain skeptical about how long that muddle-through approach will work and whether the European Union will manage to push through plans for a banking union. Opinion is also split on whether Greece will still be on board several years down the road, while worries over separatism in Spanish regions and fiscal woes in the bloc's second-largest economy France are additional sources of concern.
A fresh crisis on any of these fronts cannot be ruled out in a three-year debt saga that has been prone to setbacks whenever progress to a solution has looked to be in sight.
But this week's deal on Greece "clearly indicates how Europeans are determined to get this done, and we might underestimate that a little, how much drive politicians have to get this done," said Jelle van der Giessen, deputy CIO at ING Investment Management.
While some say that general elections in Germany next autumn could put some decisions on hold, including on the banking union, van der Giessen had few concerns.
"Pro-euro mentality in Germany is something I have very little worries about, I don't foresee that will be a major change," he said.
Even someone as bearish on the euro zone as Richard Cookson, Chief Investment Officer of Citi's (C.N) private bank, prefers European equities over U.S. shares.
"Europe's a mess and it's getting worse," Cookson told the summit, saying the bloc was making a return to growth even more remote by imposing austerity on its debt-choked members.
But when it comes to making investment decisions, he favors European equities and the risk premium they offer: "At least you're paid for taking that risk," he said.
SPAIN, FRANCE RISKS
With Greece's immediate fiscal problems settled at least for now, the focus will turn next year to the much larger economies of France and Spain. The consensus is that Madrid will eventually ask for a bailout and that this would help European stocks.
Opinions were split on what would happen if Spain opted to keep trying to pull itself out of crisis without a bailout. For Andreas Utermann, Chief Investment Officer at Allianz Global Investors, that would be a big risk to take.
"If the Spaniards don't apply for support soon, by the middle of January for instance, I could easily see markets take a dim view on this and call their bluff, and push yields up. The ECB has to start buying (bonds), everything gets more febrile and expensive," he said.
"I don't say it will happen, but it's a big risk."
Summit participants stressed it was high time for France - stripped of its prized AAA-credit rating by Moody's this month - to embark on reforms to slash red tape, shake up its economy and cut its public deficit.
But most did not see any major crisis developing in the euro zone's second-biggest economy for now, if Paris gets its acts together.
"The de-industrialization of France - to change this trend in a matter of years is clearly a challenge, to put it mildly," said Paris-based Franz Wenzel, head of strategy at AXA Investment Management.
"But we are convinced that the political set-up has smelled the coffee, that they are doing their utmost to get back on track."
Even for more bullish investors like Pioneer Investments' CIO Giordano Lombardo, who is buying euro zone bonds and stocks and sees the bloc returning to growth at least in the second half of 2013, euro zone risks remain a concern.
"The risk is that there is some major policy mistake in terms of fiscal policy," he said.
(For other news from Reuters Global Investment Outlook Summit, click here)
Follow Reuters Summits on Twitter @Reuters_Summits
(Editing by Susan Fenton)