Europe’s Mission Hardly Accomplished

The debt crisis situation in Europe is dire.

European officials, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, have promised to hammer out new fiscal agreements for this week’s summit.

The initial rumor called for tight new budgetary rules for the long run with penalties for violating them, and a new system for enforcing them. The sweetener? Germany would agree to expanded eurozone support for the sovereign debt of all eurozone members.

The odds of tighter new rules have gone down, but the sweetener remains.

The markets have so far reacted positively, if provisionally. Risk premiums on the bonds of Italy, Spain and other fiscally weaker members have fallen abruptly and stock markets are higher.

Mission accomplished? Hardly.

German support for euro-wide backing of members’ sovereign debt is certainly a game changer. It is urgently needed in the present acute debt crisis and is probably essential to preserving the euro currency zone in the long run.

And if such support is to be available, a system for assuring prudent fiscal policies by eurozone nations is also needed.

It is not that reckless fiscal policies were the common cause of the present crisis — they were not. But German and Dutch voters do not want to risk subsidizing reckless fiscal policies indefinitely.

So what should a good system look like?

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