Quite apart from the debt problems, Europe’s countries have systemic gaps, with different abilities to innovate and grow. A wide range of policy options is now discussed about what Europe should do to address the crisis, but unless a coherent economic policy is adopted, well beyond the EMU, the crisis will not be solved.

Nouriel Roubini in FP magazine has argued that “the current approach to the eurozone problem is not a stable equilibrium; it is an unstable disequilibrium. Kicking the can down the road, going from private to public debt to super national debt, throwing more good money after bad money, is not going to work. Either the EU is going to move in the direction of a greater political, economic, and fiscal union, toward integration; but I don't think this is likely because the German conditions for accepting a fiscal union is that the periphery gives up all fiscal autonomy. So if that's not going to happen, then the other outcome of this unstable disequilibrium is first, orderly and disorderly restructuring, and eventually, a breakup of the euro zone. I think it's a likely scenario”.

The European Union’s troubles with sovereign debt cannot be tackled without a more comprehensive economic policy. Governments and the European Commission now need  to take on a new role in economic policy making. They have to extend their role into the real economy by creating a fiscal authority and a federal budget in Europe, including the issuing of Eurobonds to finance new and strategic infrastructures.  

The current crisis is ultimately a crisis of insufficient demand. We cannot control sovereign debt without a European policy to increase aggregate demand. The current European Commission policy for obtaining a balanced budget on a state by state basis reduces aggregate demand and does not answer the question: how can European governments increase euro zone growth? In fact, the new stabilization measures, while making for an additional constraint to the growth of member countries’ economies, put in danger also the same stabilization policy, as with no growth, the debt/GDP ratio will not decrese.

At present, the European Central Bank does not have the power to cater for growth and inflation at the same time, hence sovereign money is not issued in relation to growth needs or to member states’ deficits.

In fact, Europe is facing two crises. The first one is concerned  with growth rates as low as to leave unchanged or even increase the unemployment rate - which is socially and economically costly – while the second involves States’s solvency.

If GDP does not grow at a rate similar to that of public spending  for social welfare,  budget deficits cannot but increase.  As the deficit is covered with public debt, thereby increasing the debt/GDP ratio (since by definition national savings are not sufficient to buy new government debt), it is up to international financial markets to determine whether the sovereign debt is worth the risk.

The potential failure of a State has an impact on the Euro, and the governments of other member countries must support the country which is in potential bankruptcy; this occurs by forcing the suffering country to produce a budget surplus, thus reducing that country’s potential output growth. Not all of Europe is suffering these conditions. Germany is growing faster than the rate of interest and its debt is not a target of speculation. The German economy enjoys an implicit competitive devaluation caused by the fact that the Euro exchange rate includes countries with a weaker shadow rate than the German one. As a result, the gap between countries with debt problems and countries with a budget surplus  is growing, and Europe’s divisions are becoming deeper.

Various solutions have been suggested to solve public debt crisis. Some are aimed at returning to viable currency policies for Euro zone countries: the idea is to leave Germany outside the Euro area, devaluing the new Euro and allowing for  export  growth. As an alternative, it is  suggested that two Euros are created: a Northern and Southern euro. Others have  pushed for action on the financial side, by pouring into a European Monetary Fund the public debt of member states up to the equivalent of 60% of GDP – as in the original European Treaty.  This obviously implies that such a Fund is financed from resources different from those of the member states, setting the stage for a European creditworthiness; something that would make the EU more similar to a real federal state.

A different approach is based on the establishment of an Agency that buys sovereign debt on the secondary market, again up to 60% of GDP, with the simultaneous development of a European bond market (blue bonds). The remaining debt would be covered by the individual member states with their (red) bonds. Interest on the blue bonds would be paid through a tax on the financial transactions.

There are also pure Keynesian suggestions. The ECB should no longer buy the debt of weaker governments; on the contrary, it should finance government deficits via monetary emission, on the basis of agreed-upon economic policies. Alternatively, 60% of the sovereign debt could be transferred to the ECB, through the emission of Eurobonds. Interest would be paid either with a share of national taxes, or through additional Eurobonds, or – ultimately - by printing money. Growth would not be enhanced by the shift in the debt, but a stronger development policy could be assigned to the European Investment Bank, via massive investment projects financed by EIB bonds.

We claim that the debt issue should be reviewed on the basis of its "sustainability" as conditioned by GDP dynamics. There is an interdependence between the parameters of public finance and growth, whereas the Maastricht criteria are purely conventional constraints, adopted on the basis of Germany’s historical experience. Such constraints do not guarantee macro stability, as the deficit/GDP and the debt/GDP ratios depend on the rate of growth of GDP.

The macroeconomic impact of investments will therefore be crucial for determining the actual sustainability of the financial framework. In this regard, it should be noticed that physical capital accumulation goes hand in hand with the accumulation of "knowledge" resulting in qualitatively different "production functions" among countries, represented in the composition of the capital stock. Hence, "systemic" gaps among countries emerge depending on their ability to innovate and therefore grow; and the cumulative effects imply efficiency and productivity themselves are path depedent.

The recent EU measures aim to "harmonize” European policies in a pact for the Euro and for the management of the sovereign debt. But European policies on competitiveness, employment, sustainability of public finances and financial stability, remain unchanged. Strengthening the European Stability Mechanism, with a dowry of 500 billion euro, could be an opportunity for member states when the Euro is at risk, but the absence of an economic policy capable of combining growth and stability remains evident.

Which is Europe’s economic policy? Is it the one advocated by Europe 2020, or that defined in the last summit, that  is constrained  to cancel the additional deficit by 2013?