Part of Foreign Affairs Report: The Future of the Eurozone

Saving the Euro Will Mean Worse Trouble for Europe

Charting the Disastrous Choices Ahead

The EU has tried repeatedly, and failed repeatedly, to calm the markets. That is not for a lack of solutions at hand. Consider three: make the European Central Bank (ECB) a lender of last resort, spread exposure by pooling eurozone debt via eurobonds, or massively increase the European Financial Stability Facility (EFSF) and start bailing out weak economies in earnest.

Any of those solutions would reinstate confidence and lead to stability, but each is easier said than done. The first and arguably best solution -- in which the ECB simply buys debt without limits from Italy or any other member state in trouble -- is legally questionable under the EU treaty; what's more, Berlin rejects the idea, citing the bank's limited mandate, and says it could spark inflation. The creation of eurobonds is a political nonstarter for northern European states distrustful of their profligate, crisis-prone counterparts in the south. And eurozone leaders have already tried -- unsuccessfully -- to create a bigger EFSF on the cheap by asking the BRIC countries to buy in.

Simply put, markets are reeling because eurozone countries have failed to go beyond half-measures to resolve the crisis. The longer they delay taking any one of the three possible solutions, the closer the markets push them to the brink of disaster. But here's the rub: if the eurozone survives, the consequences may be just as ruinous. Austerity will be a drag on growth in the center and the north of Europe, and on competitiveness in the south. Add to this increasing unemployment, inequality, and poverty, and the continent has prepared a recipe for rising social unrest and polarization on the political extremes. Not until European leaders realize the fundamental flaw in their current approach -- a lack of real political and economic integration -- will there be an end to the crisis in sight.

First, consider the euro going bust. Europe would undergo a vast and painful transformation. How exactly it would happen remains uncertain, but there is little doubt that it would be ugly. Just think of spreads on Italian or Spanish debt zooming past ten percent; one would default, then possibly the other. France would surely follow, given the exposure of its banks to Italian debt, then, even, Germany. The EU as such would nonetheless survive, along with the single market. But that is where the certainty ends.

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