On Friday, December 9th the leaders of the European Union (EU) meet in Brussels, Belgium. Guidance from these leaders has set market expectations of progress towards achieving agreement in principle of significant revisions to the EU Treaty, bringing about greater fiscal union that enforces fiscal discipline. The absence of sufficient agreement over fiscal controls has been the core problem within the 17 countries that share the Euro as their currency.
There will be many challenges to reaching agreement over greater fiscal union, but the core challenge is that of political courage. Will the European leaders recognize that some of their sovereign autonomy, possible even their political jobs, must be sacrificed in order to preserve the Euro Zone?
If the leaders can summon sufficient courage and begin to work towards true fiscal union, then the European Central Bank might reasonably be expected to act as the lender of last resort and begin to purchase bonds of the various countries in large enough quantities to stabilize the markets. They may also move towards issuing Euro bonds backed by all of the countries. All of this would begin to lessen the huge cloud of Euro concerns that has rocked markets. This would be no quick fix, but would choose the path that would preserve the Euro Zone.
If the Dec 9th summit proves a bust, it may well be followed with a disorderly process of European common currency implosion and accompanying market volatility.