Many journalists and economists are exasperated with European leaders and pessimistic about the fate of the eurozone. They are frustrated at the slow pace of European decision-making and the fact that the obvious solution -- purchases of sovereign debt by the European Central Bank (ECB) -- is stymied. The results of the most recent Euro summit in Brussels did little to placate the critics. The New York Times, for instance, considers the amount available for bailouts still too small to persuade debt markets, and frets that the eurozone is still left without a lender of last resort. Italy, meanwhile, may again be tested by speculative attacks in the bond market. The International Monetary Fund (IMF) and central banks have indicated their willingness to provide loans, and eurozone members have increased resources available to the European Financial Stability Facility (EFSF), but no one knows if this will be enough to avert a liquidity crisis.  

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So, what is the solution? Economists believe that the basic problem of the eurozone is economic. National economic imbalances, they argue, can no longer be restored through the traditional method of currency devaluation. Conventional wisdom insists that either Germany acquiesce to some sort of bailout, or the eurozone is finished. Germany must consent to either a) the issuance of joint and severally liable Eurobonds, or b) a policy of monetary easing by the ECB. The problem is being treated as a technocratic economic matter. Hence, technocrats have come to power in Greece and Italy.   

But the problems of the eurozone are fundamentally political: a) it expanded too fast as wider won out over deeper; b) there is no commitment to common budgetary policies; and c) there is no mechanism to enforce agreements. The crisis turns on central problems of international relations theory like anarchy, sovereignty, and power. 

The Brussels summit on Dec. 8 and Dec. 9 produced a renewed commitment to budgetary discipline, but only to the original guidelines agreed to some 20 years ago in the Maastricht Treaty. There was some talk of sanctions to be imposed on member states that violate these guidelines, but such sanctions are at best problematic and can be obviated by the vote of a qualified majority. Further, "automatic mechanisms" to correct deviations from debt limits are to be designed by member nations themselves.

European leaders have done the minimum possible, and then only at the last possible moment.  Although praised as a breakthrough, the agreement by eurozone members on a "haircut" of 50 percent  on the face value of Greek debt is insufficient. Serious discipline would involve European banks, including the ECB, marking their holdings of sovereign debt to market rates, currently a 60 percent discount to face value. If banks are not made to pay for their mistakes, they have little incentive to avoid them again.

Capital requirements are another area of ambiguity. European banks are required to increase their capital, but only to an inadequate 9 percent of assets. Given the perilous risk environment, a healthy bank should probably have something like twice that amount of capital. But the definition of "capital" is already being watered down by regulators, and banks are restructuring debt to improve capital levels without raising additional money.

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