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The first is how to stabilize Europe’s economy. The second is how to avoid a similar breakdown next time. Even more important is a third question: how to secure the right of Europe’s citizens to hold their governments to account.
The nuttiest aspect of the current talks has been Germany’s insistence that the second question comes first. You might say, for instance, that to lessen any future moral hazard, Italy’s debts should never be underwritten by the EU as a whole. Intelligible, if wrong.
Unintelligible is saying that it might be necessary to underwrite the debts of Italy and other distressed countries – but not until agreement has been reached on far-reaching – and slow-moving – EU constitutional reform.
Putting logic and necessary haste aside, a further danger in bundling stabilization and long-term reform together is that both get compromised. Stabilization efforts are made to pay lip service to moral-hazard concerns, so they are timid, opaque and indecisive. At the same time, the scale of the emergency is a brute fact that will oblige corners to be cut on long-term fiscal reform.
In the current crisis, Europe has tried ineffectually to support distressed sovereign borrowers through the European Financial Stability Facility, and the ECB has bought public debt on a small scale. It is the worst of both worlds.