Is a Workable Eurodeal Actually in the Works?
Italy is pressing forward with a package of austerity reforms, including tax increases on the wealthy, a ban on cash transactions over $1,000 (to reduce tax evasion), and a fairly radical pension reform which will raise retirement ages and change the way that pensions are calculated from a final-years-salary scheme to something more like the US Social Security system, which is based on average contributions over your whole career.
Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance. She rejects eurobonds on the grounds that they reduce pressure on fiscal discipline.
Mr Sarkozy's proposal could not be more different. He has said that he is not prepared to cede any sovereignty to the centre. He wants to retain the inter-governmental approach that has so abysmally failed in the past. He opposes any attempts to strengthen the European Commission, or to involve the European Court of Justice in adjudicating on breaches of the rules. While rejecting Ms Merkel's obsession with austerity, he is not interested in a genuine fiscal union either. He is open to a eurozone bond and to the European Central Bank having the role of lender-of-last resort. I would surmise that this is because France would stand to benefit from both.
I'm pretty sure that "Austerity club", as Munchau puts it, is not going to work. Perhaps it would be very nice if the Italians were more like Germans, but such transitions need cultural and institutional infrastructure that cannot be called into existence by sheer will. If you have to ban cash transactions over $1,000 in order to combat tax evasion, you raise two questions:
Do not think that Germany has merely to waive a magic wand, or incur a one-time cost, to set things right in the eurozone. Any "set things right" action on Germany's part is, one way or another, a form of doubling down. If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany. The choice is not "German action vs. doom now," it is "German action and some chance of even bigger doom later on vs. doom now." That's a tough call. The Germans understand that one better than do most of the bloggers I've been reading on the topic.