Some problems are never solved, they seem to simply fade away. Many will be hoping that may happen to the world's most pressing economic problem last year, the euro. It has defied repeated efforts by eurozone leaders to find a solution that would satisfy bond markets, and since Christmas the subject has gone quiet.

It is unlikely to fade away, however, because the euro's loss of credibility in bond markets is not primarily a financial problem, it is a symptom of Europe's constant dilemma: how united do Europeans want to be?

The adoption of a common currency was a half-way step, comparable to a foolish person stepping into an untethered boat. The euro was not tethered to common monetary and fiscal management that underpins all sovereign currencies. That would mean a common government, and for most members of the European Union that remains a step too far.

Those who have adopted the euro have discovered too late that the boat is unstable.


They must now take a second step - into a complete fiscal union with agreed limits on spending and debt - or fall into the water, with fearful consequences not just for the eurozone but for all those who trade and bank with it. Staying where they are is not an option.

Yet they still hesitate to make the step. The strongest member, Germany, is wary of taking on the costs of the boat unless it is going to be run responsibly, while others want to continue to behave as they like and expect Germany to bail them out with few strings attached.

When the euro was set up they ignored warnings that a common currency was far from harmless. Unless it was supported by common fiscal management, it would close the pressure-release valve that a floating currency offers for countries with poor productivity, lax public spending control, big budget deficits, and mounting debts.

Some common fiscal rules were adopted but they were broken even by Germany during the long boom that ended in the global financial crisis. Now that bond markets no longer have the same confidence in sovereign debt generally, the euro's weaker economies are exposed.

They cannot remain as they are. They must go forward to a much more comprehensive fiscal union or go back to national currencies. The implications of the euro's collapse are considered so dire that Europe is said to have no choice - it must go forward.

At the last attempt to step into the boat, Britain - which had the good sense not to take the first step - vetoed a treaty that would have bound all 27 nations in the European Union to tighter financial regulation. But the 17 euro users agreed to a "fiscal compact" involving a cap on each member's public debt. It might not immediately correct current account imbalances and lack of competitiveness but it attacks those problems at root.

Unfortunately, the fiscal resolution was overshadowed by vague promises to bring forward bail-out funds and make available more millions for relief through the International Monetary Fund. This offer, like several before it, was not enough to settle the markets. No amount might be enough.

With one foot on the bank and one in the boat, Europe is still putting its hope in the bank.


It needs to make the step to fiscal union on Germany's terms. Its creditors need to see that all members, especially Italy, Spain, and France, accept deficit spending limits that can be enforced credibly.

Germany's good government has given it a dominance it could not win in two world wars, but to resent it for this is absurd. The die was cast when a common currency was agreed.

The sooner euro governments take the next logical step, the brighter the global economy will be.