The sovereign debt debacle is the first serious home-grown financial crisis in Europe since the introduction of the euro in 2001. It has exposed weakness in European institutions and the totally inadequate economic and political preparation in many of the European countries that gave up their national currencies to join the euro.
The most integrated region in the world, the “European house” is obviously only half-built – well short of functioning as one seamless economic union.
But the creation of a new financial crisis-fighting tool will help to reinforce the EU and the euro as a lasting, relevant body and currency. Out of the debt crisis has come the European Financial Stability Facility, which can provide conditional emergency loans to stricken euro members – another IMF-like function. It can also shore up undercapitalized banks (just as the US government’s Troubled Asset Relief Program did in 2008-09).
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The new stability fund – in its current form – will not suffice to stem the confidence crisis gripping Europe’s institutions. Yet its creation marks the clear realization that Europe needs a fiscal compliment to its monetary union. Fiscal togetherness ultimately depends on voters’ readiness to accept ideas such as joint taxation. Although a fiscal union is the urgent message of the financial markets and European Central Bank, it won’t happen overnight. Only a lengthy process in close consultation with affected populations can make that happen. The new stability fund, however, is a crucial first step toward fiscal integration.