Is This the Last Chance to Save the Euro?

The routine has been drearily repetitive since the euro debt crisis erupted two years ago: itchy markets jostle the euro; eurozone officials promise to sort out kinks in the system; European Union leaders meeting at a "crisis summit" in Brussels declare the problem solved; after an initial surge, markets return to torment the single currency.

But with each cycle, the tension rises. E.U. leaders meeting Thursday and Friday for yet another Brussels summit have just seen Spanish and Italian bond prices reach 7%, while ratings agency Standard and Poor's on Monday put all but two of the eurozone members on its watchlist. Even the most Panglossian officials now admit that unless a credible fix emerges by the end of Friday, the euro could shatter.

This time, at least, E.U. leaders have a radical plan on the table. German Chancellor Angela Merkel and French President Nicolas Sarkozy have already agreed that the E.U. treaty must be rewritten to bring eurozone public finances under control. "The current crisis has mercilessly uncovered the deficiencies in the construction of economic and monetary union," they wrote in a joint letter to the summit chair, European Council President Herman Van Rompuy.

They hope that by revising the treaty through automatic sanctions and budget-balancing rules enshrined in national constitutions, the eurozone will regain its economic credibility, thereby calming the markets. Governments would have to submit their draft annual budgets to E.U. scrutiny before national parliaments approve them. Merkel has promised "concrete steps towards a fiscal union," in effect close integration of the tax-and-spend polices, smoothing the flaws that monetary union missed when the euro was created in 1999.

It would also provide vital cover for the hitherto reticent European Central Bank (ECB) to intervene more robustly in support of Italy, Spain and other states struggling to fund themselves in the bond markets. This is Mario Draghi's first summit as ECB President and he already hinted in a Dec. 1 speech to the European Parliament that he was ready to move if leaders adopted a new "fiscal compact". This is the key short-term challenge, according to Fredrik Erixon, Director of the European Centre for International Political Economy (ECIPE) in Brussels. "Essentially, eurozone leaders now have to prepare the necessary conditions for the ECB and other countries, through the International Monetary Fund, to take a much greater role in the crisis by intervening on the bond markets and by ring-fencing key economies," he says. And the ECB took some decisive action Thursday by lowering its main interest rate to 1%, down from 1.25%. It was the second such cut since November, returning it to the record low level that had been in place from 2009 until earlier this year.

But Franco-German common purpose is no longer enough to settle Europe's problems. The rest of the 17-member eurozone needs to agree the scheme, and the other countries in the 27-member E.U. need to know how they fit in. Even Merkel and Sarkozy have to resolve key differences between themselves on issues like whether fellow governments or the European Commission have the final say on punishing wayward countries. While everyone agrees in principle that a Europeanization of the problem requires some degree of mutual responsibility, there are splits on the degree of intrusiveness, the democratic legitimacy, the nature of the sanctions (fines, halting subsidies, or even withdrawing voting rights) and on how the rules should be agreed.

Nor does any agreement at the summit, however crafty, imply that the crisis is resolved. Treaty change is a long and hugely risky venture: the 2009 Lisbon Treaty took almost a decade to negotiate, and had to be revised twice after being rejected in referendums in France, the Netherlands and Ireland. The Merkel-Sarkozy plan assumes the amendments would take effect next March, but Ireland, the Netherlands and Austria will probably need referendums.

On Wednesday, Van Rompuy suggested the treaty could be tweaked in a way that would skip any ratification by national parliaments: he says a budget balancing requirement could be written into E.U. law by a fast-track procedure that needs only a unanimous decision of national leaders. He has also called for the future euro bailout fund, the European Stability Mechanism (ESM), to be transformed into a bank — which would enable it to access ECB liquidity — and has backed European Commission calls for the introduction of Eurobonds, although Berlin has poured cold water on both of these schemes.

Then there is the issue of whether the changes are for the whole of the E.U. or just the eurozone. Merkel and Sarkozy have said they would prefer the 27 E.U. members to agree but have warned that if that is not possible, the 17 eurozone countries will forge ahead with their own separate treaty. In a joint letter to Van Rompuy, they also called for "a new legal framework, fully compatible with the internal market, to make faster progress in areas such as financial regulation, labor markets, convergence and harmonization of the corporate tax base and the introduction of a tax on financial transactions."

That has alarmed British Prime Minister David Cameron, who is already fighting off demands from euroskeptics in his own Conservative Party to use any treaty change as a chance to claw back powers from Brussels. Cameron has warned that any extensive treaty change would have to include safeguards protecting the City of London as the E.U.'s leading financial center, and give the U.K. an opt-out from European labor laws. But given Merkel and Sarkozy's readiness to shift any agreement to the eurozone alone, Cameron will have to temper his demands or risk being bypassed.

Whatever emerges, it is likely to reflect Merkel's priorities: while the Franco-German alliance was once a balanced duo, it has shifted emphatically in Berlin's favor in recent months. Sarkozy, like the other eurozone leaders, has all but accepted that Germany is the indispensable country whose pristine, powerful economy ensures it commands authority. "Most other eurozone countries will probably hold their nose and swallow the medicine, because it cannot be as bad as watching their beloved euro collapse," says Peter Guilford, chairman of G+ Europe, a political consultancy in Brussels. But even Merkel cannot guarantee that everything will fall into place, and for all the common purpose that the eurozone is now showing, it will be a long while before anyone can declare the crisis beaten.