For two years, U.S. economists and market specialists have been announcing the collapse of the Euro. In a famous post in the New York Times, Paul Krugman announced in May the Eurodammerung. He was referring and added the famous scene of Wagner's opera, the Goetterdammerung (the crepuscule of the gods). Fortunately for Europe and the rest of the world, he was wrong on all accounts (especially the exit of Greece within one month). The Euro never went back to the parity with the dollar.
The European credibility gap
It is clear that neither has the inaction of the Eurozone nor the risks related to a collapse of the Italian debt created a sense of confidence in this country. I would, however, remind us that with one country and two political parties, we did not do better in handling the U.S. indebtedness than the Eurozone with 17 governments backed by approximately one hundred political parties speaking 20 different languages.
That should not make European politicians complacent. They do suffer from a fundamental credibility gap that makes it difficult to believe that EU ambitious program (fiscal union, banking union, political union, economic union) is more than declarations of pious intentions.
The recent summit did, as expected, delay the implementation of many of those projects, and will probably not progress until the German elections in the fall of 2013. It did however, adopt a broad agenda for the European Banking Union.
The Italian challenge
Nothing has been made to consolidate the Italian public debt that is now reaching 125 percent of it GDP and the dramatic level of 2 trillion Euros ($2 trillion). Next year, 20 percent of that amount will need to be refinanced. While Mario Monti has courageously pushed austerity measures that should produce a balanced budget in 2013, the lack of action on the public debt makes Italy vulnerable to any confidence crisis.
The announcement by Silvio Berlusconi, as a Lazarus-type comeback from the tomb, that he might run again as leader of the Italian right was immediately followed by a surge in Italian bond yields, indicating how fragile confidence is. Faced with a universal rejection, he has however indicated that he would withdraw should Mario Monti lead the center-right coalition. Italy remains the most threatening challenge of the Eurozone by a wide margin.
The Euro will not disappear
Over the last few months, a new dynamism and a sense of optimism followed the statements by all parties concerned that the "irreversible" Euro will be defended at all cost.
The unlimited ability of the European Central Bank to purchase Italian and Spanish banks to ensure an appropriate (but undisclosed) level of interest rates has not been tapped yet. It did, however, act as a deterrent to speculation and allowed interest rates to decrease "naturally."
Even Greece is not considered a much better risk, while still a junk one. Ten-year bonds yields decreased from 38 to 17 percent interest rates since February 2012.
The political resolution of the Eurozone leaders to maintain the Euro, as well as of public and corporate opinions, supported by better market conditions should not be put in doubt.
Euphoria would be short-sighted
While European leaders have accustomed us to euphoric statements, we need to remain cautious.
The process of better European integration will meet fierce resistance. Britain is certainly not prepared to join a banking union. Germany is not willing to pay for foreign bank failures as part of that union.
Even the definition of the future European banking structure is far from consensual. The decision to curb bonuses might fire back, even if it is amply justified.
The road-map is there. The road remains arduous, full of ambushes and challenging. During that journey, the Euro will remain as the anchor of European economic integration and Greece will be part of the trip.