What's next for Europe?

By Chris Tedder, research analyst, Forex.com

Greece seems to be the most likely first candidate to leave. There are pros and cons for this argument, yet we think the implications of allowing a country to leave the euro could be catastrophic for the entire region, as there are no guidelines or systems in place to support such a move. Furthermore, it is not in Germany's interests to let the Eurozone break-up. As a massive exporter they have benefited hugely from the euro through increased demand from southern European nations.

Instead, we agree with German Chancellor Merkel that a better option would be tighter fiscal integration for the Eurozone. Fiscal integration is a simple concept that would allow Eurozone nations to have a measure of control over their fellow member states through changes to existing treaties. This would allow these countries to have a say in the budget targets of nations that are struggling under huge amounts of sovereign debt, thereby preventing this sort situation from occurring in the future.

Moreover, it is understandable why creditor nations like Germany are reluctant to bailout debtor nations without having this level of fiscal integration, because without it there is no real guarantee that the debt-laden nations will be able to bring their debt levels under control. Simply continuing to provide austerity measures for these countries will only solve their short-term funding problems, but it will likely not change anything in the long-term and debt-to-GDP levels could continue to spiral out of control.

Additionally, fiscal integration could pave the way for the creation of some form of Eurobond. If debtor countries have more fiscal control over their neighbours then they would likely be more willing to spread the debt burden in the form of European bonds.

But while there are a lot of benefits to fiscal integration, it is not without its complications. Primarily, it is not a quick process to alter the needed treaties and establish new rules. This is French President Sarkozy's main concern; he has stated that the crisis needs to be fixed now and that the world will not wait for Europe. Nonetheless, his concerns are more likely personal, with France facing the possibly of losing its triple A status - in the event this happens, it would be hard for the president to recover politically in time for April's election.

Nevertheless, we believe that the pros of fiscal integration far outweigh the cons. Tighter fiscal unity will help to solve the long-term debt problems facing Europe and it should help to restore investor confidence in the region, whilst at the same time implementing controls over member states to prevent future blowouts of sovereign debt.