The fiscal union that German Chancellor Merkel has been pushing is a side show to the real game, but a necessary one. It gives the ECB an excuse to act as a lender of last resort, to stop the market pressure on Italy and Spain and contagion to France. It also keeps German voters and Merkel’s own political coalition on her side.
But the real game is not just to stop the markets but also to jump start growth. And for this, the fiscal union as currently conceived is a disaster. It focuses only on austerity, with radical deficit reduction as its cornerstone. This will not solve the growth problem. It will not end the eurozone crisis. It will just substitute a growth crisis for the debt crisis, and push Europe and arguably the rest of the world into economic recession.
France Vows Powerful Summit Deal (Reuters 12/7/11)
US Officials Quietly Cajole European Leaders on Debt Crisis (Washington Post 12/7/11)