While last week's agreement was framed by Merkel and French President Nicolas Sarkozy as the basis for a fiscal union, the system established bears no resemblance to any functioning fiscal union in history. Governing solely by rules and sanctions, imagining that national polities will somehow adhere to the goals of keeping public debt at 60 percent of GDP and budget deficits at 3 percent of GDP is fundamentally at odds with everything we know about how politics work in real life and smacks of magical thinking. The agreement is a rewarmed version of the existing Stability and Growth Pact (SGP), based on guidelines set down two decades ago when European leaders decided to move forward with the euro.
Let's recall that Germany and France both eventually violated the SGP (as they should have) when their economies needed a boost. Romano Prodi famously called the pact "stupid" when he was president of the European Commission, and economic theory has never found a rationale for the specific target numbers. What's needed is not the automatic application of mindless rules meant to be broken, but rather the discretion to decide what is right in any given situation, determined collectively by democratically elected EU leaders within the governance institutions of a real fiscal union.
Single currencies have historically been forged in war as part of larger state-building projects that wrestled power to the center through taxing, spending, and debt instruments grasped by leaders in search of the tools to survive in the face of military conflict. The European Union has been an exception, but its time may be up. As politically difficult as it may be for Merkel to recognize the need to pool sovereignty by agreeing to a Eurobond and true fiscal union, it is myopic at best for her to destroy the considerable economic and political benefits that Germany has gleaned from the euro and the broader EU project. If austerity and nonsensical rules on deficits and debts in a faux fiscal union are the only way forward for the eurozone, we should all prepare for its demise.