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The issue dwarfing all others in the euro crisis is how to save Italy. Financial engineering of the sort discussed at Sunday's summit will, at best, buy time. Ultimately, Rome needs to save itself.
As has often been said, Italy is too big to fail but also too big to bail, with its near 2-trillion-euro debt – equivalent to 120 per cent of gross domestic product. That hasn't stopped the rest of Europe trying all sorts of financial gymnastics to come up with a safety net that can hold the country.
The one scheme that could save Rome is systematic purchases of its bonds by the European Central Bank, which has unlimited ability to print euros. But France's pleas to use the ECB to leverage up the European Financial Stability Facility (EFSF), the region's bailout fund, ran into two immovable objects. Neither Germany nor the ECB itself would have any truck with an idea that looked like printing money to bail out delinquent governments.
The euro zone's bailout fund isn't strong enough to carry Italy, and, say, quadrupling its size might cost France its triple-A credit ratings. That leaves the euro zone debating various different forms of financial alchemy.
One idea is to turn the EFSF into an insurance company, or a special purpose vehicle backed by IMF cash. Another is for governments to provide guarantees to the region's struggling banks so they can raise wholesale funds. The snag is that a guarantee from a weak government might not do much good. So leaders are debating creating some sort of structure which would leave a bank's government as the main guarantor of its bonds, while bringing in other governments as something like reinsurers.
Such financial creativity – which echoes the innovation of the banking world in the runup to the subprime crisis – would be amusing if the situation wasn't so serious. What's needed is for Italy to take decisive action to restore credibility with investors.
Fortunately, other leaders are talking about this elephant in the room. Germany's Angela Merkel and France's Nicolas Sarkozy have pressured Italy's Silvio Berlusconi to take further measures to boost growth and cut debt. The details may be less important than convincing the market that the program is strong and implemented vigorously. But Mr. Berlusconi has always been behind the curve. The more outside pressure that can be heaped on Italy, the better.