Europe's Fiscal Crisis May Help the Euro's Survival

The recent fiscal turmoil and associated existential doubts about the fate of the eurozone's common currency may have actually been a particularly constructive development for the latter's future, as they have brought to the forefront the long-simmering underlying tensions with an unmistakable sense of urgency to address them head-on.

This dynamic has led to a barrage of meaningful proposals about a new, tighter framework that would allow for a better harmonization of underlying fiscal policies among the bloc's various countries and also a mechanism for closer supervision to ensure compliance with stated targets. The ECB President put forward such a plan earlier in the week (http://wallstreetpit.com/32435-ecbs-trichet-eu-governments-in-breach-of-fiscal-rules-could-lose-voting-rights), which has the tacit support of the powers-that-be within the EU. The exposition of the fault lines within the eurozone's member countries has left virtually no room for ignoring that ticking bomb that had always been identified, since the inception of the euro, as a potential threat to its long-term survival.

In the near-term, the wave of fiscal austerity measures sweeping the european countries- including, most notably, the U.K (a non-eurozone mmeber)- is meant to help defuse the immediate global financial market anxiety vis-a-vis the european countries' sovereign debt. At the same time, the longer-term plans laid out by the EU to prevent such a turmoil in the future can go a long way toward redressing the massive productivity gaps and sense of fiscal discipline in the future among the various member countries, which would strengthen the common currency's prospects.

The institutional response by the EU to the recent crisis may not be succeed in putting the recent financial market uneasiness to rest any time soon, as markets are famously demanding of hard evidence establishing the effectiveness of such measures in correcting the underlying problem. In fact, a risk does exist that, over the next couple of years, some marginal reconfiguration of the euro countries may take place, as Greece's longer-term ability to participate hangs in the balance. However, in a little noticed development last week, Estonia (with a total public debt of only a minuscule 7.2% of GDP) also announced it will be joining the euro club as of January 2011, increasing the number of participating countries to 17 (http://www.nytimes.com/2010/06/18/business/global/18euro.html).

The key point is that while a possible reshuffling of countries using the euro in the future remains a distinct risk, an outright break-up of the common currency is, by the same token, a particularly low probability outcome over the medium-term. In fact, the recent- and, mostly, ongoing- unsettling fiscal situation in the eurozone may have increased the prospects of the euro's survival down the road.

Anthony Karydakis