Lacking control of interest rates, governments need effective fiscal policy more than they did before the euro existed, not less. Their ability to borrow in recessions needs to be preserved and improved -- but not so much that they are empowered to overborrow, get into trouble and force their euro-area partners to pick up the bill. The fiscal pact adopted in response to the crisis, which France and others now seek to modify, is directed at stopping overborrowing. It comes close to abolishing fiscal policy as a stabilization tool. It’s so unbalanced in favor of discipline over empowerment that it’s unworkable and lacks all credibility.
The remedy is jointly guaranteed euro bonds -- but with strings attached. Joint guarantees are necessary to attack the problem of fragility. Without them, a crisis of confidence in one country can become unmanageable and drag down others. But strings are needed too, or governments will lack the incentive to keep their borrowing under control.
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