All of the repairs that the EU, the IMF and the European Central Bank have tried so far are, to a greater or lesser extent, already discredited by the fact the crisis has only escalated over 2011. Still the politicians dither about a decisive solution. At first they accept the need for one before suggesting it is on its way, but ultimately they deliver a package rotten with compromise.
Ultimately, the solutions are obvious and have been for some time. Governments must reduce debt burdens, stabilise banks and whip up some economic growth. But much of the current thinking revolving around austerity packages and the conflicting dogmas of national sovereignty versus collective single currency unity do not allow for this.
Either failing sovereigns should be kicked out of the euro and allowed to inflate their way out of the crisis, or politicians need to admit that co-ordinated action will lead to a fiscal union, which would involve unprecedented constitutional reform, as well as an unpopular ceding of national sovereignty.
Healthier sovereigns need to guarantee failing sovereigns — something Europe already acknowledges with the very existence of the European Financial Stability Facility (EFSF).
The authorities could declare a state of temporary fiscal union — an extreme measure for an extreme crisis. It could include a European Finance Ministry and jointly and severally guaranteed government bonds issued centrally by the eurozone member states. Eurobonds would bring down the cost of borrowing for failing sovereigns and allow them to put in fiscal stimulus that would bring about the economic growth needed without hampering the core countries (who rely upon the others to buy their goods and services in any case) to excess.
It would also solve the banking crisis by providing higher quality capital to banks through Eurobonds. As a banking regulator, a European finance ministry or similar agency would also be much more able to strong arm banks into lending more to stimulate growth — by forcing banks to make loans in return for recapitalisation, say — without banks being able to play jurisdictions off against each other.
To appease electorates, countries would have the choice to exit the fiscal union when the crisis is over. For troubled countries, the exit criteria could include bringing government deficits below a certain level. Politicians can sell this idea of fiscal union as a temporary, necessary co-ordinating measure to get out of a crisis.
Fiscal union may be a marriage of convenience rather than eternal love, but it is necessary in a crisis to stop bickering and work together.