As calls intensify for much greater fiscal union in the euro zone and the creation of a euro bond, analysts told CNBC that such measures—while necessary to contain the debt crisis—are politically untenable, leaving euro zone leaders caught between a fiscal rock and a political hard place.
German Chancellor Angela Merkel will once again discuss the euro zone debtcrisis with French President Nicholas Sarkozy on Tuesday.
Figures released earlier on Tuesday showed that economic growth in the euro zone slowed in the second quarter, putting further pressure on the leaders to find a lasting resolution to the crisis, which has hit not just stock markets but is now starting to affect the real economy at the heart of the euro zone.
The measures that come out of discussions among leaders between now and October will have to have an all-encompassing feel to them, Stephen Gallo, head of market analysis at Schneider Foreign Exchange, told CNBC on Tuesday.
"The markets are still in a predatory mode when it comes to some of the sovereign debt markets," he said.
But the creation of a euro zone bond—so far rejected by Berlin, which fears it will drive up borrowing costs for Germany and provide little incentive for other European countries to reform their economies—is “politically unpalatable” for Merkel, Gallo said.
"The Germans want something else first," he said. According to Gallo, the euro zone needs a plan before it can initiate euro bonds, as taxpayers will wonder what they are funding if there is no plan in place for the long-term health of the 17-member currency union.
Marc Ostwald at Monument Securities agreed that creating greater fiscal union would be "inordinately difficult."
"To get Germany to put up its capital means some ceding of control over national budgets in other countries, and I can’t see that that’s going to go down very well with the people of those countries," he said. “To create a fiscal union takes a long time. Markets haven’t got much patience with the euro zone right now,so we are caught between a rock and a hard place.”
Ostwald also questioned the sustainability of the European Central Bank’s bond-buying program to support euro zone debt.
"Sustainability is questionable if they were to have to carry on with this through to the end of September. On that sort of pace one would have to wonder what sort of balance sheet risks they’re accumulating. Not that they’re carrying the risks themselves in truth, because they’re always absorbed by government," he said.