Be prepared for euro-zone fallout

Eurogeddon has been averted, for the moment at least. Led by Germany and France, the 17 euro-zone members plus nine other members of the European Union have made a pact to deepen economic and fiscal integration with the aim of saving the euro. But it came at the cost of a fundamental split in the EU. Britain, a non-euro-zone member, stayed out of an agreement to draft an inter-government treaty to impose more central control over national budgets, with a consequent loss of national sovereignty.

Britain opted out over fears the deal will harm its national interests - particularly the independence of its dominant financial services industry.

It remains to be seen whether an agreement to ensure the long-term solvency of a currency union that has teetered on the brink of breaking up, with 15 members including France facing the threat of a credit-ratings downgrade, stabilises the euro.

It does nothing concrete to unlock the funds needed to ease the European sovereign debt crisis and the liquidity pressure on banks holding government bonds, or even clarify the prospect of jointly guaranteed sovereign bonds.

Much now depends on the response of the European Central Bank, lender of last resort for Europe's banks. It has already moved to ease banks' liquidity problems with measures such as relaxed collateral requirements for loans, but has so far stopped short of backing governments whose debt woes weigh so heavily on the banks and credit markets.

In that respect German Chancellor Dr Angela Merkel has had to juggle her demand for institutional reforms aimed at saving the euro with voter resistance to more guarantees of German taxpayers' money to fight other countries' sovereign debt crises. As a result, some euro-zone members still face the threat of an imminent credit downgrade.

Europe has nonetheless made progress in the long term in meeting the demands of Beijing and Washington among others that it put its house in order for the sake of global economic growth.

But without more immediate action to relieve the debt crisis, this is unlikely to be enough to give China and other potential saviours the confidence to commit to the scale of support that Europe has sought.

Even when the crisis is resolved, the European economy will take a long time to recover.

That has implications for economic management on the mainland and Hong Kong. Our government would be wise to heed the advice of the International Monetary Fund to prepare a range of contingency measures to combat the fallout if the global outlook continues to deteriorate.