The deficit is a political issue

Another grave financial convulsion is hitting the economies of Italy and Spain, and threatens to affect France. In spite of new governments in Italy and Greece, and the ongoing drizzle of congratulatory statements by EU economic representatives on the tenacity with which Spain is implementing its adjustment policies, both the Italian and the Spanish risk premiums keep rising, while the French one is also showing disturbing signs. Angela Merkel was too optimistic when, at the end of the October summit, she said that the EU's political leaders had come up with an adequate response to the euro zone's problems.

We can rule out that the new governments in Italy and Greece constitute, per se, a solution to the euro's financial chaos. It is not a shortage of economic or technical knowledge that keeps pushing up the costs of financing in Italy, France and Spain, however clear it may be that Berlusconi and many of his backers never understood that the magnitude of the crisis invalidated their political delaying tactics and haggling ploys. Indeed, the euro zone's problem is not technical but political; that is, it calls for political initiative rather than specialized economic know-how.

All the diagnoses have been made, and the treatments defined. All that is left is to implement them. The investors, the markets, so often invoked by the defenders of strong, technical governments, need to know what the institutional framework of EU finances really is. Just as they know that of the US, the sterling area, Japan and Brazil. The only solution that will dispel the pressure on the EU is the creation of a euro Treasury, just as the dollar has the Federal Reserve. A European Treasury, empowered to answer for regional defaults (just as the Fed absorbed California's bankruptcy), and to issue euro bonds.

But Germany and the countries of its orbit (Austria, Finland, the Netherlands) do not accept this definitive solution. It would involve a cost for their respective debts. In the case of the EU, investors do not know what the final financial architecture will be, and when it will be finished. Every economic restructuring has its benefits and costs. Merkel does not accept the costs, and does not dare to carry the Union to its logical conclusion. She is offering showy distractions, such as a trillion for the European Rescue Fund, and haircuts for Greece. These are mere patches, which do not hold up against even the slightest speculative pressure.

The cost of political indecision is unacceptable. Spain is paying ¤100 million daily in debt interest, due to a risk premium far out of line with its serious adjustment efforts. The cost of financing is strangling our budgetary resources, limiting our capacity for investment in economic reactivation, and imposing a freeze on our social services. Germany's iron orthodoxy is not innocuous. It is proving very costly to Spain, Italy and the bailed-out countries. It may also affect France. Will this be the red line, the frontier after which Germany will finally agree to constitute an EU Federal Reserve?