The world wants the eurozone to act, to do something that impresses the financial markets, a “big bazooka”, as David Cameron puts it. Among the recommendations generally given are an increase in the size of the European financial stability facility; a primary market debt-monetisation programme by the European Central Bank; standby arrangements by the International Monetary Fund; bank recapitalisation, and a once-and-for-all resolution to the Greek debt problem. No matter what you do, do it now, and do it big, eurozone leaders have been told.
This is unhelpful advice, and if followed, it would make the crisis worse. A big bazooka, without a simultaneous commitment to a fiscal union in the distant future, could turn out to be extremely destabilising.
It is apparent that we have reached the end of the line with the present system of a monetary union that refuses to be a fiscal union. We are right at the edge of what is legally, politically and financially possible under the current legal and political structures. That is why the Europeans are tinkering, and not firing.
It was always likely that the eurozone would eventually reach a bifurcation point when it will have to decide whether to adopt a fiscal union or break up. We are getting closer to this point. A big bazooka, not backed by any credible commitment to fiscal union, sounds like a great idea, but it would end up accelerating the break-up. If you want to preserve global financial stability, the message you should send to Angela Merkel and Nicolas Sarkozy is adopt joint and several liability, rather than encourage them to search for another elusive quick fix.