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Market participants are still considering several different scenarios for the euro area − ranging from fiscal union, through remaining basically intact, to total break-up. Llewellyn and Westaway judge that the most likely outcome – their base case – is that the euro area will remain basically in its present form, and that none of the present members will leave. Europe’s policymakers now seem to appreciate more clearly the nature and extent of the problems they face. Moreover, the political will to overcome them is strong.
Policy is advancing on a number of fronts. The full package seems bound to include stricter budget rules, policies to fix the banks, strengthened structural reform, macro-prudential reform and perhaps a competitiveness “pact”. Moreover, as the crisis resolution mechanisms are made permanent, this stands to provide the euro area with many of the powers and tools required for long-term sustainability of monetary union. This present crisis is unlikely to be the last to afflict Europe: it may take further crises to impel policymakers to enact the full set of policies needed to create a truly sustainable monetary union.
Europe’s future path will not be straightforward. Even some years from now, monetary union may not have become fully sustainable. However, as structural policies bear fruit and structural characteristics converge, the union will become less prone to the sorts of problem that have been afflicting it, and better able to deal with new types of shock. This crisis may not be the last, but, provided that political will remains, Llewellyn and Westerway believe Europe will continue to advance, step-by-step, towards sustainability.