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Europe's debt crisis: Five ways it's been put to good use

Europe's debt crisis has roiled financial markets and populations. But beyond nationwide strikes and gyrating markets, Europe has put its crisis to good use. Here are five trends that will ultimately strengthen the European Union and the euro currency.

By Jacob Funk Kirkegaard / September 6, 2011



Washington

Europe's debt crisis often seems like a giant snowball accelerating down a hill. With each rotation, it picks up more destructive power.

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Squabbling officials are tossed to the side, unable to agree on robust responses. Citizens feel crushed. Financial markets speculate on which country will be flattened next, and how that will affect the American economy.

And yet, Europe is not facing political or economic collapse. The euro remains a resilient currency. In fact, stepping back from the crisis provides quite a different view: lasting transformation that will – in the long run – strengthen the 27-member European Union as a whole, and the 17 nations that share the euro currency.

Reforms in the weaker euro economies on Europe's periphery – Greece, Portugal, Italy, and Spain for instance – are so dramatic, it's as if the Margaret Thatcher of the 1980s has hopped the English Channel.

These changes may not be sufficient to avert short-term problems, such as a further restructuring of Greek government debt or more instability reverberating from Italy’s notoriously dysfunctional political system. But in five critical ways, they will make the EU far better equipped to face long-term political and economic challenges:

1. A 'real' central bank for Europe

For starters, the European Central Bank (ECB) is now behaving much more like a real, activist central bank, making financial stability a priority in the entire euro area.

In the past, it acted more like an enlarged version of the German Bundesbank, devoted exclusively to price stability through inflation control. Like the Federal Reserve, it is now willing to "do whatever it takes" to overcome the effects of chaotic financial markets as it supplies banks with liquidity and purchases government bonds from fiscally troubled countries in the euro area.

This willingness to act and the ECB's unique position as a supranational central bank – not beholden to any individual government – gives it unprecedented leverage over reform in individual euro-area capitals.

Like the International Monetary Fund – a knight that rescues economies but only if they carry out needed reforms – the ECB in July demanded additional fiscal austerity and labor market reforms from Italy in return for bond purchases of Italian government debt.

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