The dramatic EU funding proposal is an important first step. Next comes enforcement of tough fiscal reform guidelines, which introduces a series of new political challenges and risks.

EXCITEMENT AND APPREHENSION

The high-stakes deal among the key member states to provide a huge lending facility for "fiscally challenged" countries was a historic breakthrough. Exhausted EU policy makers expressed a mixture of and excitement and apprehension. Their jobs just got more important, and harder.

On the excitement front -- it buys the eurozone time in the eyes of market participants, and also demonstrates that in a moment of true crisis, the big players (i.e. Germany and France) can compromise and take bold, coordinated policy moves. The deal also implies at least a partial "federalization" of the EU budget, so if all goes well, the primacy and relevance of the EU will be enhanced. Finally, there was a sense of relief that the "fiscal laggards" will finally be held to account in a more credible and systematic manner.

On the apprehension front -- the hard work now begins. It's one thing to announce a huge headline number, but quite another to devise, negotiate and implement that more "credible and systematic" fiscal policy regime.

The tensions and competing fiscal reform agendas were papered over but not truly resolved. The bureaucratic coordination and country-level political challenges will be persistent and real.

EU policy makers think there are a number of possible outcomes: (1) an exit from the euro by one of the "big two" troubled countries (Spain and Italy); (2) a German exit from the euro in the intermediate term (4-5 years); (3) the crisis has effectively been resolved by the funding announcement and initial implementation moves, and the eurozone returns to sustainable growth and stability; (4) a muddle-through story where the euro remains credible and generally resilient, but this is accompanied by ad-hoc responses to mini crises, generally constrained growth and a real risk of political tensions over time among a number of core EU member states.

Scenario four is by far the most likely scenario. The crisis has generated a fiscal consolidation consensus in Europe. And there will be mechanisms to enforce fiscal reforms. In broad terms this consensus will hold in for the rest of 2010.

But there will also be serious tensions, particularly in the intermediate term. At the strategic level, Germany and France still have fundamentally different views about how to manage the trade-offs between inflation and growth (with Germany being more hawkish with regard to inflation), and this will continue to inform their approaches to fiscal reform. At the national level, countries such as Spain will be making dramatic cuts to spending and entitlements. This may prove to be politically unsustainable over time. And at a third, cross-regional level, Eastern European EU member states such as Poland will be inclined to agree with Germany's push for deep fiscal reform in Southern Europe.

What this sets us up for is a complex process of negotiation among competing bureaucracies and countries. If the eurozone is to survive as we know it, this entire new enterprise needs to work well enough. But there will be interconnected political risks emerging in Brussels, among coalitions of EU member states and within individual countries, regarding the costs and benefits of reform.

Ian Bremmer is president of Eurasia Group, a political-risk consultancy, and the author of "The End of the Free Market: Who Wins the War Between States and Corporations?"

Preston Keat is director of research for Eurasia Group.

Available at Amazon.com:

The End of the Free Market: Who Wins the War Between States and Corporations?

The Great Gamble

At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes

(C) 2010 Ian Bremmer and Preston Keat