These are consequential developments whose impact will be felt for years, and the latter is not limited to Europe. Virtually every country in the world is exposed.
When it comes to the global economy, Europe is systemically important for at least three huge reasons. First, it is the largest economic area in the world and, as such, an important source of demand for the rest of the world. Second, with its banks holding large claims on nonresidents, their forced deleveraging will transmit waves of credit rationing well beyond the EU. Third, by fueling volatility and uncertainty, the European crisis has a material influence on the functioning of global markets.
To make matters worse, this crisis comes at a time when the United States is struggling to regain growth and generate enough jobs. Moreover, though the large emerging economies (Brazil, China, India, Indonesia, and Russia) are much healthier, they lack both the willingness and the ability to compensate fully.
It is critical for the welfare of billions around the world that Europe get its act together now. The continent faces an increasing probability of having to navigate a fourth potential morphing in the next few months. Should it materialize, this would take one of two forms: either a disorderly and highly disruptive fragmentation of the eurozone, or the establishment of a smaller and less imperfect eurozone that has a different relationship with the rest of the EU.
Both possibilities involve yet another set of immediate disruptions for Europe and the global economy. As such, the temptation among politicians will be to avoid making any active choices. But that would constitute a huge mistake. It would further reduce their future degrees of freedom due to an even narrower set of possibilities and, with that, erode their ability to influence outcomes.
As time passes, the option of a smaller and less imperfect eurozone is becoming the only way to "refound" a union that would have the chance to stand the test of time and, thus, constitute a key component of medium-term efforts to restore global financial stability, meaningful economic growth, and plentiful jobs. It is not an absolute best, and it would be a messy process involving the risk of collateral damage and unintended consequences. Yet, when judged in terms of feasibility and desirability, it sure dominates the alternative of a full fragmentation.