Euro groan

Last weekend,the finance ministers of Europe met and gave their countries a week to solve the eurozones problems. In advance of the heads-of-government meeting this coming weekend,however,some have already begun to dial back expectations. After all,the burden is enormous. Concerns about sovereign debt after Greeces fall have raised the possibility that even countries like Italy and Spain might find it tough to roll over debt,and move suddenly from illiquidity to insolvency. That would not just destroy them,but also the northern European banks that have invested heavily in southern Europe. There are few ways out of this: perhaps through buying Italian and Spanish bonds,to keep those governments afloat; or perhaps by recapitalising European banks,to ensure the contagion is contained,and they begin lending to each other again. But Europes leaders,as always,seem unable to commit fully to an agenda,held up by competing national interests,priorities,ideologies,and even egos.

The answers lie,as always,with France and Germany. France is looking weaker than ever today,its banks overextended and its triple-A rating under threat. Société Générale,Frances second largest bank,is particularly thinly capitalised. What this means is that a credible commitment to help secure Spain and Italy,and the banking system,would strain French finances. And presiding over a rating downgrade of the proud Fifth Republic would be political suicide,and Nicolas Sarkozy knows it. So expanding the stabilisation fund enough to end the crisis seems unlikely,and Europe is thus left chasing odder methods.

The only real solution for Europe is what it always has been: to grow out of the crisis. Yet the problem is that,since so much of its trade is intra-European,a combined drive to control spending,for fear of sovereign debt downgrades,will cause demand to shrink and the actual problems in southern Europe to get worse as a consequence. The only real alternative is to put in place growth-boosting policy in trade and labour,for example. This weekend,the 27 leaders of Europe will hopefully decide on just that. And after they meet,the 17 leaders of the eurozone countries will stay behind and try and rescue their currency. It looks increasingly likely that the only way they will is by committing to ever closer union. Europes problems of economic coordination are feeding off themselves; and it is difficult to find a political leader who does not sadly agree that ceding some sovereignty to a federal economic government is an inevitable consequence of this crisis.