But the panic that EMU may disintegrate is overdone. Rather than a default and subsequent exit from the euro zone, the member states are more likely to overrule a fundamental principle of EMU and bail out a fellow member state.

The European Central Bank has played a crucial role in preventing a worst case scenario, but the obvious lacuna in Europe s economic and monetary union (EMU) remains EMU established only a monetary union and largely omitted the economic union that has proven so closely linked to the euro s strengths and weaknesses.

And large scale has meant destruction of many of our landscapes, destruction of biodiversity still a lonely emu here in the Brazilian cerrado soybean fields.

By supporting to such a degree two new EU members that are not part of EMU, the EU countries have demonstrated a much greater commitment to mutual aid than was thinkable only a few years ago. And more is expected to come in November 2008, the Ecofin Council increased the ceiling for possible balance of payment loans to non EMU countries to 25 billion.

I believed then and still do that European integration is a very good thing. But the textbook economics I was teaching showed how damaging EMU could be in the absence of European fiscal and political union.

With its loans to Hungary and Latvia, the European Commission has already revived a credit facility which was dormant since the European Monetary System crisis in 1992 and for countries outside EMU. The support is huge.

FRANKFURT Since Europe s Economic and Monetary Union (EMU) was created, no progress toward political unification has been made or even really attempted. Now that Europe s current crisis has convinced many that existing institutional arrangements are unsustainable, this may be about to change.

When it comes to internal competition policies, most European countries still think within the national box. For the euro to help lift European growth and productivity in any significant way, governments must allow indeed, encourage stronger competitive forces across the EMU area.

With fears mounting that one or another euro zone country may default, yield spreads on government bonds between EMU countries have reached record highs. For some time now, Greek ten year government bond yields have been about 300 basis points above German yields.

In ten short years, the euro revolutionized the global economic environment, rising to the status of the world s second currency and rivaling the dollar as a medium for international trade and finance. The EMU is now the world s largest market, and continues to grow.

CAMBRIDGE The European Economic and Monetary Union (EMU) and the euro are about to celebrate their tenth anniversary. The euro was introduced without serious problems and has since functioned well, with the European Central Bank delivering the low inflation that is its sole mandate.

It maps out the architecture needed to guarantee the minimum level of convergence required for the EMU to function effectively, and calls for a more integrated financial, budgetary, and economic policy framework. Specifically, the report highlights the need for the eurozone to make two fundamental commitments.

In this context, eurozone leaders must ask themselves tough questions about the sustainability of the current system for managing debt in the EMU. They should begin by considering the two possible models for ensuring stability and debt sustainability in a monetary union the mutualization model and the liability model.

As for economists like me, who have balked at advocating an end to the failed euro experiment and favored reform, perhaps it is time to admit defeat and move on. If only anti Europeans oppose EMU, the EU baby could end up being thrown out with the euro bathwater.

But why would the EU fall into chaos and the euro wilt if the Treaty of Nice remains in force. In the area of monetary integration, the European Constitution doesn t change anything, other than the voting procedures in the Governing Council if EMU grows beyond 15 member countries.

But the current economic crisis may provide a severe test of the euro s ability to survive in more troubled times. While the crisis could strengthen the institutions provided by the EMU, it could also create multiple risks, of which member countries need to be aware if they want to avoid them.

There have, of course, been many examples in history in which currency unions or single currency states have broken up. Although there are technical and legal reasons why such a split would be harder for an EMU country, there seems little doubt that a country could withdraw if it really wanted to.

Trust in European institutions has collapsed, and political parties skeptical not just of the euro, but of the entire European project, are on the rise. And yet most economists, even those who were never keen on EMU in the first place, have been reluctant to make the argument that the time has come to abandon a failed experiment.

Belgium followed the mainly French monetarist school, while the Netherlands shared Germany s preference for economic convergence before committing to exchange rate parity. Once President Valéry Giscard d Estaing and Federal Chancellor Helmut Schmidt made the joint Franco German proposal for the Economic and Monetary Union (EMU), both Belgium and the Netherlands worked together to achieve that common goal.

Coupled with all this is northern European discontent with the central bankers, specifically with the ECB and the euro. It is not that the end of European Monetary Union is on the agenda it is merely that people have begun thinking about possible low probability futures in which the end of EMU might be placed on the agenda.

There may be some justification for each EMU state to be represented in the G 8, but not in the main economic organizations. If they volunteered to act collectively at these forums, Europe would free up much needed space for other important countries at the top table of world economic discussions, which would foster greater respect for global policymakers.

Against this background, it seems inconceivable that the EU should refuse to support an EMU member in a situation similar to that of Hungary and Latvia, especially as all the countries that are currently on market watch lists are long time EU members. In case of real distress, the rest of the EU will offer a bailout package.

The dangers of a centralizing approach can also be seen in the relationship between the 17 current eurozone members and the 11 non eurozone EU states. As the former press on with greater integration, the adverse economic consequences of doing so are likely to deter the latter from EMU participation (which may be another sign that institutional competition cannot be suppressed forever).

Europe should lead by example offering the world the benefit of its deep experience of financial diplomacy and volunteering to take the first steps forward. Given that Europe managed to construct EMU, the Maastricht Treaty, and the stability and growth pact that underlines the euro, it should be relatively easy for euro zone experts to help devise a system for judging G 7 type membership.

But the crisis confronting Europe is not so much about political union as it is about European Economic and Monetary Union. If anything, efforts to hold EMU together may have taken us further from the goal of a common foreign policy by re igniting within member states (regardless of whether they give or receive financial aid) nationalist resentments that we hoped had died long ago.

Indeed, the no bailout clause in Article 103 of the EU Treaty according to which neither the European Central Bank, the EU, nor national governments shall amp 160 be liable for or assume the commitments for other national governments has lost its credibility. The political and economic costs of letting a fellow member government fail are simply too high in the closely interconnected EMU.

It remains to be seen how willing the ECB will be to provide national central banks with the volume of euros needed to play this role fully. If a country sees its banks failing because its national bank cannot lend them enough, it may chose to leave the EMU so that its central bank can provide whatever amount of local currency it deems necessary.

A Europe built around such a core corresponds to what I call a Saturn model, with a huge planet in the middle, surrounded by rings, converging sooner or later in the center. The outer circles are the transition countries, while the rings around the center would be EU countries that still refuse to join the EMU, or do not yet fulfill all the conditions, like Romania and Bulgaria, or eventually the western Balkan countries and Turkey.

Since 1999, members of the European Monetary Union (EMU) have experienced a number of severe exogenous shocks the rise in the price of a barrel of oil from around 10 to 150 the collapse of equity markets after the dot com bubble imploded the spreading risk of terrorism after the September 11, 2001, and two wars. Starting last summer, the breakdown of the market for US sub prime mortgages triggered turbulence in financial markets, with no end in sight.

All of this assumes that political leaders would select only a policy change that they think will be in their nation s long term interest. But there is also a risk that some politicians act solely out of self interest, seizing on the economic downturn as an opportunity to get elected by promising to withdraw the country from the EMU, or by saying that they will threaten to do so if the other member countries do not agree to their proposed policy changes.