DAYS OF RECKONING FAST APPROACHING FOR THE EUROZONE

Europe's harsh austerity programs have pushed depressed economies even deeper into depression. Growth has stagnated. Debt is out of control. In vulnerable economies like Spain, interest rates are veering toward usury. Governments are bailing out banks. And Greece has imploded both politically and economically with citizens now emptying their bank account. Because investors look at the state of a nation's economy when assessing its ability to repay debt, austerity programs haven't even worked as a way to reduce borrowing costs.

What is the alternative? Continuing on the present course, imposing even-harsher austerity on countries that are already suffering Depression-era unemployment, is what's truly inconceivable. What Europe needs are more expansionary monetary policies, in the form of a willingness on the part of the European Central Bank to accept somewhat higher inflation. It also needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent's periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard time. But at least there would be some hope of recovery.

On the political side, the long-term fix must be the establishment of a fiscal union, a true political federation. But this is a solution that will take decades to implement, for a crisis that is escalating by the week. The final destination is, in any case inherently implausible, given the lack of pan-European solidarity, revealed by the current mess.

Some say that what Europe needs is a Marshall Plan to promote growth, along with a two year grace period allowing governments to get their deficits under control. Some say that the Euro should be devalued so that it's at par with the dollar, which would help boost exports and give the Euro zone a little more oxygen to recover. The problem is that today there's no more oxygen to speak of.

In the end, the final decision will not come not from Brussels but from Berlin. Unless Germany accepts that the European Central Bank must act as a lender-of-last resort in buying sovereign bonds of weaker Southern European states and/or removes its objections to Eurobond issuance, then the currency union will only exacerbate the imbalances in the European economy and increase the economic and political pressures currently building to breaking point. Admittedly if Germany frees the European Central Bank to act in this way, it will of course demand a loss of sovereignty over fiscal policy in Italy, Spain, Greece etc.. which will take much ingenuity on the part of the local politicians to disguise. But that does seem to be beyond their wit. The real question is this: Will the German people and political leaders calculate that it is in their intererests substantially to subsidize the borrowing costs of the Southern Europeans, and thereby to pay more to borrow themselves, than to see a demise of the Euro and lose the inbuilt competitiveness which, coupled with their hard work, has underpinned their export economy for the last couple of decades?