The European Union is entitled to crow as it marks this week's 10th birthday of the euro.

Remember the skeptics (especially in Britain and America) who confidently predicted that the single currency would never happen; or that, if it did, it would soon fall apart? And the traders who, in the euro's feeble early months, called it a "toilet currency"?

Today the euro is well-established and strong -- so much so that it is widely seen as a haven from the world's financial storms. Yet it would be wrong to infer from the birthday celebrations that the euro's troubles are over. In truth the single currency is heading for the trickiest moments of its short life. Euro-skeptics were right that the real test of the single currency would come when Europe's economies fell into deep recession. As job losses mount and businesses go under, criticism of the euro and the European Central Bank can be expected to mount. And in the places that suffer the most -- Italy and Greece, say -- more voices may begin to question whether euro membership was such a wise idea.

In practice, the constituency for getting out is tiny, even in Italy. For most countries, the costs and practicalities of leaving the euro, which might entail default as well as devaluation, would clearly outweigh the pain of staying in. Yet the persistence of this pain reflects perhaps the biggest disappointment of the euro's first 10 years. Enthusiasts hoped that the discipline of living within a single currency would unleash a wave of bold supply-side reforms that would transform productivity. In practice, far from promoting reforms, the euro has offered weak governments like Italy's protection against capital markets that might otherwise have punished their pusillanimity.

One bit of evidence supporting this paradoxical notion is that spreads on different government bonds inside the euro area have until recently been wafer-thin. The markets have tended to behave as if default risks were essentially similar across the currency zone--hence the talk of "convergence plays" on countries close to euro entry.

This seems strange, not least because the euro's members are not liable for -- and are explicitly banned from assuming -- the debt of fellow members in default. And a byproduct of the credit crunch seems to be an overdue market re-evaluation. Spreads on Italian and Greek debt over German bunds have widened sharply.

Prudence needed in Rome

With luck this should focus attention on governments with the worst records of reform, control of public finances and competitiveness. Indeed, the markets may now begin to act as a stronger catalyst for change than the single currency managed to be on its own. One euro-area finance minister already concedes glumly that what matters for him is "the markets, not Maastricht" (a reference to the criteria for entry into the euro).

The same should hold for would-be members on the fringes of the euro area, many of which have become keener to join since the financial crisis hit. Several countries are finding that they are too small to run an independent currency (although this does not seem to be true of Britain). Strictly speaking, the Maastricht criteria for the euro never made much economic sense. But the message behind them -- that irreversible entry into a single currency necessitates reform to make economies more flexible and competitive -- is sound. So long as it is heeded, the euro's next decade should be as successful as its first. If it is not, then expect the next 10 years to be harder.