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A currency dealer walks past a screen displaying the exchange rate between the U.S. dollar and the euro at the headquarters of the Korea Exchange Bank in Seoul.

JO YONG-HAK/Jo Yong-Hak/Reuters

It was the European Union's trillion-dollar gamble, and at least for a day, it worked.

The immediate goals of the unprecedented intervention by the EU and the European Central Bank - a €750-billion ($980-billion) package aimed at the continent's sovereign debt crisis - were to protect the euro before the speculators could move in for the kill, and allow Spain and Portugal, the probable next victims, to roll over their bonds and fund their gaping budget deficits.

The move had the desired effect. Debt, currency and equity markets around the world soared. European stocks rose the most in 17 months. Some European bank shares climbed 20 per cent. The euro went up and so did oil, and yields dropped on government debt owed by Europe's weak sisters.

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The alternative to the EU's extraordinary plan was unthinkable. The euro zone, the 16 EU countries that use the currency, faced an existential nightmare. If the attacks on the currency and the bonds were allowed to continue, the euro zone could have been torn apart. Alan Ruskin, head of currency strategy at Royal Bank of Scotland, said the EU faced no real dilemma, noting that "the alternative was really too awful to contemplate and the many hundreds of billions of euros promised as a rescue package this weekend should still seem a cheap price to pay, assuming the union can be saved."

But the vast fortunes now being thrown at the Europe's growing problem might not, in the end, save the euro zone.

Already, there are concerns that the flood of rescue money will encourage the countries fond of lavish spending to throw fiscal discipline out the window.

The euro zone support package was forged by the EU finance ministers during an emergency weekend meeting in Brussels that ended in the early hours of Monday morning. The effort came within days of the launch of a €110-billion rescue package for Greece, which was on the verge of default after its debt was relegated to junk status.

While that rescue will theoretically prevent Greece from defaulting in the next two years, it had not stopped the debt disease from infecting Portugal and Spain, two countries with potentially crippling budget deficits, vulnerable bonds and half-hearted attempts to put their fiscal houses in order.

Last week the euro lost almost 5 per cent against the dollar and Portuguese and Spanish bond yields rose to crisis levels. With hundreds of billions of euros of potentially explosive sovereign debt on their books, European banks faced a new credit crisis. The EU had no choice but to launch the first serious attempt to fix the wider euro zone debt problem, not just the Greek one.

Almost seven times bigger that the Greek rescue attempt, the newest attempt consists of a €440-billion loan pledge funded by EU countries, €60-billion from the EU's budget and up to €220-billion from the International Monetary Fund (which had already contributed €30-billion to Greece's emergency loans).

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In addition, the ECB will expand its liquidity provisions with other central banks, including Canada's, re-start dollar liquidity swaps with the U.S. Federal Reserve and create a program to allow the ECB to buy EU government debt.

With all this firepower at its disposal, the ECB will have the extraordinary ability to drive the yields of Greek, Portuguese, Spanish and Italian bonds to the levels it thinks appropriate.

But that does not necessarily mean the war is won. The moderate rise in the euro on Monday - less than 1 per cent - suggests the worst may not be over, and economists said the rescue package fixes nothing beyond the short-term solvency problems of the weakest euro zone countries.

Mike Ryan, UBS's head of wealth management research, and Stephen Freeman, the bank's research head, said "the program does little to address the structural budget problems that lie at the heart of this crisis, other than some unspecified commitments by Spain and Portugal for further fiscal discipline."

Michael Mitsopoulos, economist in Athens for the Association of Greek Industries, said that the package certainly alleviates funding pressure the euro zone weaklings. But he fears "it may replace the discipline that the market would put on them."

What didn't change on Monday was the long-term solvency position of the struggling euro zone countries. Greece's budget deficit is 13.6 per cent. It is supposed to fall to the EU's 3-per-cent limit by 2014. But the spending cutback will almost certainly plunge the country into deep recession, tax receipts will fall and civil servants are fighting the government's assault on their lifestyles. Rioting last week killed three people in an Athens bank.

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Spain, meanwhile, has an unemployment rate at 20 per cent, and its savings banks, stuffed with dud loans made to the sinking property sector, are falling apart. Its deficit is expected to be a hefty 11.4 per cent of GDP this year and its recession persists. This is not a country whose solvency problems will go away, with or without the EU stabilization fund. Portugal's health is equally poor.

What every economist agrees is that the bailout effort has to be followed by reforms that will shake the euro zone to its core if it is to survive. The Stability and Growth Pact - the euro zone membership test that insisted on budget deficits limited to 3 per cent - has to be entirely overhauled for the simple reason it failed to do its job.

Fiscal policies across the euro zone have to be tightly supervised, perhaps even integrated. Each country has to make itself more competitive through labour, pension and tax reform, and bureaucracies have to be streamlined. "The bottom line is that without a strengthening of the euro zone's fiscal discipline and its growth potential, any euro strength will be short-lived," said UniCredit Group chief economist Marco Annunziata.

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