As Mark Rutte, the Dutch prime minister, said after his country’s recent election, Europe’s political centre has won the quarter-finals. It is too early to rejoice – the semis (France) and the final (Germany) still lie ahead. Nonetheless, I am confident that the centre will hold and that the eurozone will differentiate itself from the UK and the US. Markets will breathe a sigh of relief, and Europe’s blossoming recovery will finally be fully appreciated and draw in capital. This prospect, while brighter than many would have forecast at the start of this year, should not lead European leaders to be complacent. The continent faces deep challenges, from security to cohesion, over the medium term and has hard work to do to overcome them. The Anglo-Saxon world never tires of reminding Europe of its faster-growing, more flexible economies, which enabled a quicker recovery from the financial crisis. Less well known is that in the US, real wages for the bottom 90 per cent of the income distribution have not increased over the past 15 years, while they have gone up in large parts of the eurozone. And while income inequality has been rising in the US, from an already much higher starting point, it has not increased significantly in the eurozone. This is likely to matter for political outcomes. Global investors have been so obsessed with the risk of the eurozone following in the footsteps of the UK and US that they have largely overlooked the brightening outlook, which has three main underpinnings. First, medium-term inflation expectations have turned higher. After a long period of disinflation and in some countries outright deflation, core inflation has stabilised, albeit at low levels. Continued policy support is needed for inflation to get back to the European Central Bank’s below-but-near 2 per cent target in a sustained way. But the recent declaration of victory over the threat of deflation by Mario Draghi, ECB president, was notable. Even six months ago, many market participants thought the efforts of the ECB to reflate the economy with negative interest rates and large bond purchases would fail.Second, traditional economic readings, as well as big data signals, point to a clear pick-up in growth in both France and Germany. Third, there is significant pent-up demand for investment, which has lagged behind the recovery in gross domestic product. Stronger confidence has the potential to spur more risk-taking on new projects. Overall, investors are too downbeat. The market-implied GDP growth in the next 12 months for the region’s big four economies is a sizeable half percentage point below where it should be. Such a wide discrepancy appears mostly due to political risks. Reduced political concerns, particularly in France, could spur a relief rally across European risk assets such as equities, and a pick-up in Bund rates that many savers will welcome. After a gruelling, crisis-laden decade, a celebratory mood is in order, on display this weekend with the celebrations of the 60th anniversary of the Treaty of Rome. This is not to say that threats do not remain. They do, most notably in security and immigration, economic growth, and convergence. Immigration and security are top of citizens’ minds, and the rest will be irrelevant if these are not handled to voters’ satisfaction. Europe has all the ingredients needed for growth but it needs to get rid of what is preventing that growth “soufflé” from rising. These include: large legacy non-performing loans that clog bank balance sheets, constraining the provision of credit to firms and households that have the capacity to invest and consume more; over-regulation stifling activity and job creation in the service sector; and barriers to cross-border activities. For convergence, we need more sensible common economic policy guidelines, and effective compliance. This can be achieved through a combination of discipline with greater solidarity and mutual-support mechanisms. These questions are not simple, but good technical solutions exist and are within reach of Europe’s mandarins. Political will is more elusive. Here, though, we may be near a turning point. France and Germany will soon have newly legitimised leaders. For Europe’s sake, and the world’s, they need to get together and – like predecessors since Charles de Gaulle and Konrad Adenauer – thrash out a grand bargain to offer to the other members as a foundation for discussions to put the European project back on track. Failing that, the brightening outlook may be short lived – and the outcome of the next election round much darker.