David Prosser: Decision day for the eurozone, but the biggest challenge is yet to come

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The Independent Online

Outlook It is decision day for the eurozone. Angela Merkel may have done her best this week to lower expectations that today's summit of eurozone leaders might finally provide a definitive plan of action for dealing with the single currency bloc'ssovereign debt crisis, but that is what investors in that debt are expecting. If a coherent plan is not forthcoming from this summit, you can expect them to start charging even more to lend to many eurozone nations – including too-big-to-fail Italy, where yields are already close to the level at which the markets begin withdrawing credit.

Given that imperative, one would expect eurozone leaders to at least agree on what might be described as the easier matters, though that's a relative term. Having promised months ago to recapitalise those banks that failed last week's stress tests, they should be able to come up with a roadmap for that process. The question of restructuring Greece's debt is trickier, but there is now common ground that some sort of haircut is unavoidable for private sector bondholders.

Easing these short-term pressures, however, is not the same thing as providing an adequate response to the fundamental challenge presented by this crisis: that the structure on which the single currency is built has proved unsound. Or, to put it another way, that monetary union in the eurozone is not sustainable without greater fiscal convergence.

In hindsight, it does not take an economics genius to see the flaw in the project. If countries are yoked together with a single currency and an interest rate policy set at the centre, there are going to be stresses if some countries then need to borrow much more heavily than others. This is why the eurozone's founders imposed strictlimits on members' borrowing right from the start – only to see those rules routinely breached in recent years (by all countries, if the truth be known, but particularly by those countries now at the eye of the sovereign debt storm).

There are two solutions to the quandary. Either the eurozone accepts new structures that bring it much closer to fiscal union, or it gives up on monetary union. The most compelling lesson of thecurrent crisis is that you can't have one without the other.

In that sense, Ms Merkel's warning earlier this week is more understandable. For while this might be the nub of the matter, the eurozone's members do not currently feel up to picking this fight. The economic lesson may besimple enough to follow, but countries do not wish to give up more sovereignty to the centre.

Nor should they do so lightly. For what fiscal union means, in the end, is surrendering power over taxation and spending, including handing over much greater sums to a centralised eurozone finance department. That might bedesirable for the aims of the single currency project, but it flies in the face of democracy, for citizens of the eurozone would then have no way to hold to account those responsible for spending their money. Taxation without representation, one might say.

Still, these issues are not going to go away, however much Ms Merkel and her colleagues might like them to. And until they are properly confronted, the eurozone crisis will just keep flaring up again and again.

We will get some answers today, but not to the most important questions of all.

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