Greece?s Cabinet on March 3 approved a fresh austerity package that includes an immediate freeze on pensions, further salary cuts for public sector workers and a sharp increase in the value added tax. Greek finance minister George Papaconstantinou has announced measures aimed at raising an additional 4.8bn euro this year to achieve the country?s target of reducing the budget deficit by four percentage points to 8.7% of GDP. The new package, the third to be announced since the socialist government came to power in October, comes as Greece prepares to return to international markets to roll over about 10bn euro of debt due to expire in April 2010.

At the same time, German chancellor Angela Merkel has started to prepare her government with a ?tool box? that it could deploy quickly should it become clear Greece has no other funding options. German officials have in the past expressed a preference for a joint effort by members of the euro zone, which would involve either direct loans to Greece or buying its bonds, with each nation finding its own way of doing so. Ministers agreed that any help for Greece could only come as ?a last resort?, both to keep Athens under pressure to reform and because of German constitutional strictures.

The recent declaration by the European Council in favour of a Greek bailout may not have gone as far as some people had wished. But it was an event of historic significance nonetheless. The EU has acknowledged, for the first time, that the euro zone has a political dimension, and is willing to defend itself against speculative attack. At the same time, the EU will attach strong conditionality to any aid. Whether euro zone member states will buy Greek bonds outright or merely guarantee them is an important technical issue, but the most difficult part was the political agreement.

Predicaments of the sort Greece is facing?years of overspending, leaving bond investors worried the country can?t pay back its debts?weren?t supposed to happen in the euro zone. Early on, countries made a pact aimed at preventing a free-spending state from undermining the common currency. The pact required countries adopting the euro to limit annual budget deficits to 3% of GDP, and total government debt to 60% of GDP. But Greece hasn?t met the deficit rule in any year, except 2006. It has never been within 30 percentage points of the debt ceiling. It has revised its deficit figures, always upward, every year since 1997. A majority of other members also failed to meet the requirements at least once over several years.

As Greece?s financial crisis rumbles onwards, it has become commonplace to argue that the roots of the problem stretch all the way back to the design of Europe?s single currency. The currency union was seen by some politicians as a way to pull the EU towards political union; others, mainly in Germany, emphasised the need for fiscal and monetary rectitude. Once a country is in the currency, little can be done to a wayward member because the euro?s architects built in no real means of enforcement.

Euro zone?s dilemma

The problems in the euro zone are manifold. First, most citizens of the EU still feel far more attached to their own nation than to the union. There is little sign that the Germans are willing to spend further billions to turn around Greece?with the spectre of similar crises to come in Spain and Italy. The Germans may feel very ?European? in principle, but when they are asked to start writing big cheques to support a bankrupt Greek state, they start to feel strangely German again.

Second, public debt is soaring and the European Commission?s projections for the decades ahead look scary. Arguably, cuts to state spending pose a greater threat than in the US or the UK to continental European economic models, where the public sector plays a large role. Policies that helped avert a worse recession?labour market subsidies and generous welfare systems?may simply not be affordable in the future.

Third comes the dire problems of individual states. Greece has pledged fiscal frugality?but has not escaped the risk of an ignominious EU or IMF bailout. Ireland?s government faces a rocky road as it pushes to cut wages. Spain?s deficit has exploded and Italy?s public sector debt as a share of GDP is around Greek levels.

Fourth are the creaks in the euro zone ?rules-based? governance. Without a single political authority, the EU?s stability and growth pact remains the reference point for fiscal policies. But its credibility is at stake. It would be unrealistic to expect many euro zone countries to bring debt below the 60% of GDP limit within a decade. Fifth, joblessness has increased less steeply than in the US, thanks to government measures, but the starting point was higher. Persistently poor job prospects?especially for the young?will add to social tensions besides dragging down growth.

Sixth, the free market-orientated structural reform agenda to combat unemployment and boost growth long proposed by the ECB and Brussels could face greater resistance. After all, rigid labour markets arguably help explain why the euro zone escaped recession ahead of the UK and the US. Seventh, the ECB has to implement its ?exit strategy? to unwind late 2008?s emergency measures at a pace that encourages banks to shore up their finances?without creating fresh systemic threats. Some at the ECB worry about inflationary risks it may have created longer term. But Athanasios Orphanides, Cyprus?s central bank governor who studied the 1930s Great Depression, recently warned of the opposite: of a weakened economy resulting in inflation persistently undershooting the ECB?s definition of ?price stability??an annual rate ?below but close? to 2%.

Eighth is the threat of further euro appreciation?especially if the ECB implements its exit strategy faster than the Fed. Lastly, policymakers have to make the best of an EU compromise on the future of bank supervision. Current plans for beefing up regimes fell short of his ideal, Mr Trichet told the European parliament last month: the ECB would have preferred a greater role in policing the largest banks.

What can be done?

The first priority is to address the internal imbalances. Spain and Greece suffered a significant loss of competitiveness against Germany, which needs to be partially reversed in this decade. Even now, the gap in real wage costs continues to widen. For this, you need a policy coordination mechanism that involves political leaders, not just finance ministers. While Spain, Portugal, Greece and Italy should reform their labour markets; Germany should be encouraged to raise domestic demand.

The second priority is fiscal consolidation. Growth rates in this decade are likely to be lower than in the last. In almost all euro zone countries, consolidation is best accomplished through expenditure cuts, not tax increases. It is possible that Greece may yet muddle through this crisis. But, in a world of rapidly rising sovereign debt, the next euro crisis might only be months away. At that point, the members of the European single currency will once again be asked how much they are willing to do to help each other out. If the answer is still ?not very much?, the euro area might begin to shed some of its weaker members. The consequences could go well beyond the single currency. The EU would have a crisis of confidence and the likely result would be that other powers it has acquired could fall in jeopardy. There is more than money at stake in the Greek crisis.

Work starts in April on the ECB?s 500m-plus euro new HQ in Frankfurt. The challenge will be to create an EU landmark that befits an age of austerity?while exuding just enough confidence.

?The author is a Wharton Business School MBA and CEO, Global Money Investor