Greece forestalls tragedy, but fear still plagues euro

Greece's election is yet another short-term "rescue" of the euro but some more sweeping, longer-term measures are badly needed.

By a very narrow margin, the people of Greece decided on Sunday not to jump off the tightrope. Yet they may still fall off, or be pushed, as the rest of Europe and the world scramble for more stable footing.

The Greek election result, like so many other euro "crises" of recent years, will buy some time of relative stability for financial markets, but does nothing to heal either of Europe's fundamental financial problems: the common currency is still built on fiscal quicksand, and sovereign debt levels remain unsustainable.

Remaining in the euro zone will mean long lean years for Greeks, at best. But there are only 10.8 million Greeks in the euro-zone population of 332 million, and the latest drama in the economic crisis does seem, more than previous episodes, to have concentrated some minds and generated some creative thinking. A proposed European banking union, in particular, may offer a way forward.

In banking and investment, the real danger comes from fear: when faith in financial institutions falters, the edifice of debt and equity markets is shaken. That's the problem in Europe, and while a good election result can cheer investors briefly, only structural reform and debt reduction will truly rebuild confidence and stability.

Full euro-zone fiscal union - one tax rate, one budget, one finance minister - could create the conditions for financial security and a slow, determined reduction in sovereign debt. But there is not one country where voters would agree to cede so much national sovereignty.

Less drastic measures of integration, however, become more possible as the euro passes through successive near-death experiences. More centralised regulation of banks, an idea supported by the European Central Bank, would help strengthen lending institutions imperilled by heavy burdens of debt, increasing trust among banks to keep credit flowing. This could help to open the way for "Eurobonds" backed by European governments collectively.

However, Germany, which sees - correctly - that such bonds would in practice be backed mainly by Berlin, says it rejects a banking union unless accompanied by a full fiscal union. The requirement could well kill the idea.

Even Germany's mighty economy is weakening in this climate of perpetual crisis. Ideas such as a banking union, and Eurobonds partly backed by member states' gold - another idea being circulated - offer some promise of a permanent way out of the impasse. Such ideas need more study - and soon.