Eurozone must do more than muddle through As the eurozone crisis approaches its third anniversary this week, "muddling through" has become policymakers" watchword. On October 19 2009, George Papaconstantinou, youthful finance minister in Greece's newly-elected socialist government, informed eurozone colleagues that the Greek public deficit would be 12.5 per cent of gross domestic product - more than three times that forecast by Athens earlier in the year. Even if it was a while before markets realised the extent of Greece's fiscal plight and the severity of the financial storms that were to follow, Mr Papaconstantinou's admission set off alarm bells behind the scenes. But it was not until the following May that eurozone leaders presented an effective crisis response, including the launch of a bail-out fund for distressed member states. Since then, each turn of the crisis has brought market sell-offs, policy reactions, short-term relief . . . and then complacency, backtracking and a re-intensification of the crisis. Now we are somewhere between the complacency and re-intensification phases: the European Central Bank has offered to backstop eurozone bond markets but Spain has yet to fulfil its pre-requisite of an externally-agreed economic rescue programme. Although investors have learned to trade the cycle, long-term uncertainty over the future of Europe's monetary union has discouraged conviction investing and contributed to low trading volumes. It has halted merger and acquisition activity and shelved initial public offerings. Thus, a popular wish on trading floors is for a clearing of the air - an event or series of events that clarify the direction in which Europe's 14-year-old monetary union is heading. The benign scenario is a decisive leap towards a stronger fiscal union with a mutual bank deposit insurance scheme and common bond issuance. But catastrophic outcomes - a broad debt restructuring or eurozone break-up - would at least allow a fresh start, the argument goes. Some even believe a eurozone break-up would be cathartic rather than catastrophic. Adair Turner, chairman of the UK's Financial Services Authority, argued last week in a speech in London that "we have an enormous national self-interest in the eurozone either taking the steps required to succeed or, if that is politically unattainable, dissolving in a controlled rather than chaotic fashion." "Muddling through" - taking steps sufficient to avoid catastrophe - would be legitimate as a strategy if it nudged the eurozone towards resolving its structural flaws and creating conditions for a return of investor confidence. Progress is being made: Spain and Italy have embarked on sweeping structural reforms unimaginable a few years ago. A "banking union" is under construction. Countries have pooled resources to help distressed economies. The ECB has broadened its role as lender of last resort. Ireland's government is returning to the markets. Were more favourable economic winds to blow across the continent, perceptions about the eurozone's fortunes could change measurably. But "muddling through" is dangerous if delays simply increase the scale of the problem. When the Greek crisis erupted, it was assumed to be easily containable: after all the country's economy accounts for about 2 per cent of eurozone GDP. Back in 2009, the idea that Spain - the eurozone's fourth-largest economy - would end up submitting to an economic programme drawn up by the EU and possibly the International Monetary Fund was a horror scenario. We are near that point now. Meanwhile, three years of crisis have sent Europe's economic integration into reverse, weakening further the continent's growth prospects. In a paper released last week by the European Council on Foreign Relations, Sebastian Dullien, professor of international economics at Berlin's university of applied sciences, argued that "no matter how the euro crisis plays out, the single market will never be the same as it was during the carefree years of the 2000s." While brutal exchange rate moves might be avoided, a default strategy of "muddling through" would make permanent the wedge between financing costs in northern Europe and the crisis-hit southern periphery countries. Social unrest and high unemployment could trigger a further backlash against European integration. Still, Professor Dullien describes "muddling through" as only the "second-worst outcome." While the "least bad" would be a leap towards more integration of continental Europe's core economies, the worst would remain a eurozone break-up that shattered Europe's single market. Few believe a controlled dissolution is possible. Even Greece's exit might unleash storms greater than after Lehman Brothers" collapse. But "muddle through" is far from the riveting, positive turnround story financial markets are desperate to hear. Ralph Atkins is FT capital markets editor