Italian Prime Minister Mario Monti said on Tuesday that Europe was starting to see light at the end of the tunnel of the eurozone's sovereign debt crisis, belying a welter of deteriorating economic data.

As eurozone unemployment hit a euro-era high and Spanish data showed capital fleeing its banks and retail sales falling again, Monti's optimism was at odds with sentiment in markets, which are losing hope of swift intervention by the European Central Bank to address the region's problems.

Monti has campaigned for concerted action by the eurozone's rescue funds and the ECB to bring down ruinous borrowing costs that threaten to force Spain and Italy, the currency bloc's third and fourth largest economies, out of credit markets.

"It is a tunnel but ... some light is appearing at the end of the tunnel. We and the rest of Europe are approaching the end of the tunnel," the Italian leader told RAI public radio before flying to Paris to meet French President Francois Hollande.

Monti said decisions taken at last month's EU summit were starting to bear fruit.

"We are now seeing the results both in the willingness of European institutions as well as from the governments of individual countries, including Germany," he said.

ECB President Mario Draghi said last week the central bank would do whatever it takes within its mandate to preserve the euro, raising investors' expectations of a resumption of a long-suspended government bond-buying program.

However, there has been no public sign that Germany, the eurozone's biggest economy and main paymaster, sees the need for urgent action.

"Today will probably be a quiet last day of the month. Everybody is waiting for Thursday to see if Draghi can deliver," said Lex van Dam, hedge-fund manager at Hampstead Capital, which manages $500 million of assets.
"He'd better pull a big rabbit out of his hat."

But central bank sources cautioned against expecting dramatic action at the monthly meeting of the ECB's policy-setting Governing Council, saying bold moves could be at least five weeks away because other elements must first fall into place.

They said Spain would first have to formally request a eurozone assistance program, which it has so far resisted doing, and eurozone governments would have to agree to use their rescue funds to buy bonds in tandem with the ECB.

MONEY FLEES SPAIN

Monti, who will also visit Finland and Spain, said he hoped his meeting with Hollande would accelerate moves to strengthen the euro and spur growth.

He also said he was confident Spanish Prime Minister Mariano Rajoy would be able to tackle the country's problems.

The scale of Rajoy's challenge was highlighted on Tuesday when figures showed that capital flight from Spain accelerated in May, the month when Madrid was forced to nationalize the fourth biggest lender, Bankia, and before eurozone countries agreed to help bail out Spanish banks.

Net outflows, excluding central bank operations, rose to 41.3 billion euros in May from 26.6 billion euros in April, the Bank of Spain said. Capital outflows in the first five months of this year totaled 163.2 billion euros — equivalent to about 16 percent of economic output. The same period last year saw a net inflow of 14.6 billion euros.

Spanish retail sales fell by 5.2 percent year-on-year on a calendar-adjusted basis in June, separate data showed, marking a 24th straight month of declines.

Spain also holds the region's highest unemployment rate in the bloc at 24.8 percent. Eurostat, the EU statistics office, said another 123,000 people were out of work in the eurozone in June, putting the overall unemployment rate at 11.2 percent of the working population, a new euro-era high.

Near-bankrupt Greece meanwhile reported that it is fast running out of cash as it awaits the next installment of aid from international lenders.

Deputy Finance Minister Christos Staikouras said that in the absence of 3.2 billion euros needed to repay an ECB bond on Aug. 20, Athens would lack the money to pay everyday public expenses ranging from police and other public service wages to pensions and welfare benefits.

"Cash reserves are almost zero," he told state NET television. "it is risk to say until when (they will last) ... but we are certainly on the brink."

REWARD HARD CHOICES

Speaking to reporters in London on Monday evening, Hollande voiced support for Monti's campaign to persuade eurozone leaders and institutions to act to reduce Italian and Spanish borrowing costs.

"European solidarity is of course about laying down discipline, but it's also about allowing countries that made hard choices to be rewarded with lower interest rates," Hollande said during a visit to the Olympic Games. "That's what Mr. Monti will repeat to me, and I will give him my support."

The French leader said courageous leaders such as Monti could only retain public confidence if they were able to show that sacrifices were rewarded by the markets.

"If countries undertake austerity measures and still have very high interest rates, how can they win the trust of their people?" he said.

Monti spoke by telephone with German Chancellor Angela Merkel, who is holidaying in northern Italy, during the weekend.

Berlin agreed in principle at an EU summit in June that the eurozone rescue funds could buy bonds of countries that risk losing access to capital markets, but was angered when Monti said such support would not entail any stricter economic conditions or international monitoring.

There has also been renewed pressure from France, Italy and some central bankers to give the eurozone's future permanent rescue fund a banking license so it can borrow money from the central bank to fight bond market contagion.

The Sueddeutsche Zeitung said supporters of the idea were gaining ground in the eurozone, but central bank sources told Reuters a legal opinion commissioned by the ECB had concluded such a move would breach an EU treaty ban on monetary financing of governments. Germany and its central bank, the Bundesbank, have rejected the idea.

But a eurozone official told Reuters last week that Berlin may be softening its opposition.

Safe-haven German government bonds rallied on Tuesday and a fall in Italian and Spanish yields halted as skepticism over the prospect of bold ECB action set in.

Investors remain concerned about Spain's ability to fund itself because of a prolonged recession, the cost of cleaning up its banks and worries over the finances of its autonomous regions.

In Italy's case, market support for Monti's economic reforms and fiscal discipline is tempered by political uncertainty over the way forward after a general election next year, when his technocratic government's term expires.

Some investors see the risk of a comeback by former Prime Minister Silvio Berlusconi as a tunnel at the end of the light.