The 'Merkel put' is a safe bet

Architects of the European integration never hid their view that this unique historical process was bound to proceed by crises. But they did not consider that a fatal design flaw. Following Machiavelli, they thought that periodic tremors would offer opportunities to correct problems, and to make further progress in binding together Europe's erstwhile irreconcilable enemies.

These opportunities do exist. As an example, here is what Germany ran up against when it recently tried to set up an effective quick fix for major structural problems that led to the last financial crisis.

Apparently seeking to avoid a long and uncertain process of treaty changes, German Chancellor Merkel proposed, during the euro area summit on December 19, 2013, that member countries sign a "binding contract" with the E.U. Commission with respect to fiscal policy and structural changes they were required to implement.

Spain's prime minister would have none of it. For him, a "binding contract" was out of the question. Interestingly, Spain was supported by countries which usually vote with Germany, such as Austria, Finland and the Netherlands.

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John Thys | AFP | Getty Images

According to a well-informed source, the German chancellor responded by saying: "Without the necessary cohesion, the monetary union will explode… but if this text is not acceptable to Spain, let's drop the whole idea…come to the edge of the precipice to act, let's go home and wait… you will see what will happen, and who will pick up the pieces…" and if we have to

Playing the Paris-Berlin axis

The German initiative was then rescued by the French president, who suggested discussing the matter again after the elections for the European Parliament scheduled for late May. Chancellor Merkel agreed, with a caustic remark: "I don't want anybody telling me that they lost the elections because of contracts…" It was concluded to take a decision on this issue by next October.

This example shows how much the cohesion within the monetary union cannot be taken for granted. It also shows the struggle to reach a consensus on something that looks like a quick, simple and robust device to plug that leaking structure.

Undaunted, Chancellor Merkel will continue to push for "binding contracts" as a major building block toward the euro area fiscal union. She knows that even such a transitional measure would create, with the European Central Bank (ECB), a strong political, institutional and functional framework the common currency does not have at the moment.

In spite of this temporary setback, I therefore believe that the process leading up to the fiscal union remains on track. All the euro area leaders know that the fiscal union is the only way to put an end to improvisations and violations of non-binding rules about deficits and public debt. They also know that this is the only way to lead Greece, Italy, Portugal and Ireland back to fiscal sanity. In the third quarter of last year, these countries' crippling public debt went from 125 percent of gross domestic product (GDP) in Ireland to 172 percent of GDP in Greece.

But the political calendar is too charged now for any major decisions. European parliamentary elections will be held in late May, a new president of the European Commission has to take over in October, and a new president of the European Council (a forum of the E.U. heads of state and government) will begin his/her mandate in December.

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A German made fiscal corset

Meanwhile, technical consultations will continue. After the European elections, Germany will get French support to set up a more binding budgetary process within the euro area in a way that would not require major and immediate treaty changes.

Financial markets seem blissfully oblivious to all of this. They should not be because this next step will be of great importance for the stability of the common currency. Here is why.

The area's fiscal consolidation has made considerable progress, but countries like Ireland, Spain, Portugal and France – where deficits range from 4.1 percent of GDP (France) to more than 7 percent of GDP (Spain and Ireland) – are still far from the euro area budget rule of 3 percent of GDP.

An even more serious problem is the need to set up a binding institutional framework to guide and maintain fiscally sound policies in the euro area as a whole.

Greece, for example, will probably report a budget deficit of only 2 percent of GDP for last year, with a substantial primary budget surplus (i.e., budget balances before interest payments on public debt), but all this may be compromised by the country's political instability and unfinished administrative reforms. Greece needs a strong, German-made, fiscal corset.

And so does Italy. The budget deficit for last year is expected to be somewhere around 3 percent of GDP. There is no progress compared with 2012, and Italy is falling far short of its commitment to reduce its huge and rising public debt of 133 percent of GDP. To make matters worse, all that is happening in the midst of such an unruly political process that even the Italian Episcopal Conference had to appeal last week for calm in the parliament, where the party led by a comedian is trying to block the proceedings, create chaos (chanting: "buffoons," "fascists," "thieves"), bring down the government and provoke anticipated elections.

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Looking at all this, Chancellor Merkel's pathos sounds more foreboding than anything I have seen in a long time. But make no mistake: the German leader is a convinced European – a person whose unrelenting efforts to strengthen the euro area investors can take to the bank.

She now has two powerful and likeminded partners to work with: the French president and the ECB president. She is the leading player of a formidable trio fully aware of what has to be done to keep the euro as an instrument of peace and prosperity on a continent where the worsening unrest in Ukraine serves as a reminder of Europe's unfinished business.