The euro crisis cannot be solved by yet another one-sided solution

The Economist

When the history books are written, will December 8th-9th be seen as a turning-point in the euro crisis? That is when Europe's leaders were due to meet for the latest in a string of much-ballyhooed summits at which they repeatedly promise big reforms to their rules to save the single currency.

The focus of the summit was clear thanks to a deal on December 5th between the two people who matter most: the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy. It will be all about tightening the euro's fiscal rules. The "Merkozy" duo have decreed that the priority should be a march towards greater fiscal discipline, to be enforced by strong referees.

Yet such a priority is dangerously lopsided. If the euro is to survive, Europe needs a more balanced plan to build the fiscal and financial integration that matches today's monetary union. Finding ways to police governments and prevent fiscal profligacy is part of that. But it is only part; it is not the most important component; and, on its own, it is unlikely to work.

A set of incomplete ingredients

Consider, first, what Mr Sarkozy and Mrs Merkel have agreed to. By the end of March 2012 they want the European Union's member governments (ideally all 27, but if need be only the 17 that are in the euro) to sign up to an overhaul of the fiscal rules. Euro members would enshrine both debt and deficit ceilings in their constitutions. The European Court of Justice would determine whether this national legislation was sufficiently binding. Sanctions on countries that broke the ceilings would be more automatic than they are now.

Whether or not all this requires a full-blown—and disruptive—change to the EU treaties is a matter of anxious debate. The president of the European Council, Herman Van Rompuy, thinks much can be done simply by changing a protocol; Mrs Merkel thinks that is not enough. The British prime minister, David Cameron, is already being awkward. But in any case such reforms, for all the political brouhaha surrounding them, will not be enough to solve the problem. The odds of deterring a malfeasant country with fines, however semi-automatic they may appear, are slim. And the flouting of fiscal rules was not the only, or even the main, cause of the problem in the first place. Today's crisis is less about fiscal profligacy than about investors' fears for the euro's sustainability and their flight from peripheral assets. In the short run an obsession with austerity could make matters worse by deepening recession. And without a framework for common financing, investors' confidence will not return.

On this score the Merkozy vision offers nothing. Mrs Merkel persuaded Mr Sarkozy to rule out jointly issued Eurobonds. He got her to water down the idea that private bondholders must take a hit whenever countries get into trouble. The hope seems to be that tough talk on fiscal discipline will be enough to persuade the European Central Bank that it should step in more boldly. Mario Draghi, the ECB president, has indeed hinted that a "fiscal compact" could elicit such help. But there is no strategy on the bigger question of how and how far euro-zone countries should go towards joint liability for some debts.

This is crucial. The past ten years provide ample evidence that fiscal rules alone are not enough (and if you want to be really scared, look at Europe's experience in the 1930s of monetary rigidity without a lender of last resort). If, however, new stricter rules were combined with some form of joint liability, then there would be a reward for good behaviour and also a credible sanction: any country that overstepped its fiscal limits could not benefit from Eurobonds.

That would still leave a lot of other things to do, including structural reforms to boost competitiveness and the creation of a truly European banking system. But the core of the solution has to be the link between good behaviour and joint liability.

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