(By Mani) The outcome of the Greek election reduces the probability of a near-term collapse of the Eurozone. However, the problem in the euro area is not fixed.
Authorities should brace for a long-term solution to the euro crisis, and several experts have cited various ways of solving the euro issue.
"In our view, a long-term fix, which would be the best possible outcome, would start with more fiscal transfers to a centralized authority say, in Brussels," Wells Fargo economist John Silvia wrote in a note to clients.
These transfers would facilitate economic and financial support of countries that are in distress, either now or in the future, by countries with the ability to provide lending support. In addition, joint liability for, at least a part, of individual country debt is probably necessary as well i.e., issuance of so-called "eurobonds".
However, nations with the ability to provide fiscal transfer such as Germany, Finland and the Netherlands undoubtedly would balk at the prospect of unlimited and unconditional support to their less thrifty neighbors. In return for fiscal support, these nations would demand some veto over the budgetary processes in the recipient countries. In other words, budgetary authority would need to be centralized.
A fix would also entail more centralized banking regulation and supervision, with deposit insurance being provided at a European-wide level rather than by the national authorities. In addition, more resources for bank recapitalization are needed.
Increasing the size of the European Stability Mechanism (ESM) by allowing it to be used to recapitalize banks would be a welcome step, in our view," the economist added.
In short, a credible long-term fix for the sovereign debt crisis in Europe that has been ongoing for more than two years would involve a radical restructuring of the current European economic and political system. If implemented, a long-term fix would be the best possible outcome because it would prompt the crisis to dissipate.
However, such radical restructuring of society often encounters significant political constraints and rarely occurs quickly, and so we believe that the probability of the European debt crisis being "fixed" soon is very low.
Meanwhile, an exit by one of more countries from the Eurozone cannot be ruled out in the coming days. Such a scenario would likely entail government default and banking sector collapse in the affected economies. Since, most European leaders are aware of its severe consequences, they will take steps to prevent it from occurring.