Europe is currently the biggest risk to the global economy. At this point, the dissolution of the eurozone is a remote possibility. The cost of disintegration, relative to the benefit, would be too high for the member countries and the world. The European debt crisis has more to do with the lack of fiscal union than it has to do with debt. The proposals presented at the December 9 EU summit are positive steps toward a fiscal union and necessary for survival of the region. We think this is just the beginning of fiscal integration, and we are likely to see more proposals in the future. There still needs to be a sufficient backstop in place to regain market confidence, such as more bond buying by the European Central Bank, IMF loans, and a larger and more robust EFSF/ESM. These are not solutions to the sovereign debt problem but will buy the eurozone time, as the move to fiscal union through austerity and debt reductions will take several years.
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