As the talks of a banking union drag on, they will inevitably lead to discussion of a fiscal union, as the different pieces are intertwined and complement each other – the idea of a banking union without a fiscal backstop makes little sense. There will be three parts to any kind of fiscal union in Europe: a programme of direct bank recapitalization – in Europe's case, by the European Stability Mechanism; an EU-wide system of deposit insurance that both prevents a run on banks in weaker countries and reduces moral hazard; and some form of debt mutualization.

Before the anti-federalists recoil in dismay, it is important not to fall prey to binary thinking – it is not "everything or nothing". Between no fiscal union of any kind and a fully-fledged "United States" or Swiss-style confederation, many possible intermediate states exist that would contribute to a much greater sense of fiscal solidarity and discipline.

Reform of European financial governance is a necessary but not sufficient condition for success. It will not be able to gloss over the major issue at the centre of the crisis: the competitiveness gap between Europe's north and its south. Fixing the EU banking system and regaining macroeconomic stability will do a lot to help southern countries increase their productivity but, importantly, these countries will need to engage in a long-term project to increase their labor market flexibility, foster competition and competitiveness, and make more and better investments in growth-enhancing areas such as education, technology and innovation.

A crucial consequence of all these reforms must be the injection of entrepreneurial energy into the continent's "lost generation". Youth unemployment is a cancer at the heart of the European economy, stealing its future and sapping its growth potential for decades to come.

The good news is that reforms are underway. Despite slow progress in implementation, the "Europe 2020" strategy is designed to kick-start competitiveness in the region. I believe that the path ahead is clear, that Europe's leaders will begin to look forward with hope and optimism and not backward with fear, and that Europe is more likely to confound the pessimists as the year ahead unfolds.

The continent's optimism will strengthen as leaders recognize that Europe stands together or falls apart. There is no country on the continent sheltered from the pain of this crisis. What is crucial now is that the continent's polity is able to envision the gain that will emerge from the pain, and is able to articulate this in a way that pulls them towards their shared future.

Professor Klaus Schwab is Founder and Executive Chairman of the World Economic Forum. His e-book, The Re-Emergence of Europe, will be published on 14 December and available free of charge.