LONDON The leaders of France and Germany, under pressure to resolve the euro zone's debt crisis once and for all, have laid the ground for the next stage of European integration.
The joint initiative by French President Nicolas Sarkozy and German Chancellor Angela Merkel reflects a realization that disparate fiscal policies within the euro zone are sowing the seeds of its destruction.
But the insistence of the bloc's two dominant members on Tuesday that measures such as a larger euro zone rescue fund or common bond issuance can wait leaves the currency area at the mercy of further destabilizing attacks from the markets.
"This meeting is all stick -- fiscal rule enforcement -- and no carrot -- a pooling of fiscal resources via a common bond," Rabobank strategist Richard McGuire said.
Despite fierce opposition from Germany, many experts believe the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint euro bonds.
Dutch Finance Minister Jan Kees de Jager said on Tuesday he could not rule out the possibility that common euro zone bonds would be introduced at some point to combat Europe's debt crisis.
And Sarkozy also said it could happen one day, once iron-clad fiscal rules for the euro zone's members were in place.
"Euro bonds can be imagined one day, but at the end of the European integration process not at the beginning," he told a joint news conference in Paris with Merkel.
Common issuance would inevitably push rock-bottom German borrowing costs higher and Germans fear it would lessen the incentive for the bloc's high debtors to put their finances in order.
Merkel sounded more negative without ruling out the option forever.
"I neither think that Europe is at the point of needing its last resort, nor do I think that we can solve these problems with what I have called a bang," she said.
Instead, the two leaders proposed a golden rule for euro zone members targeting balanced budgets, a commitment by governments to act on any criticism from the European Union's executive, and an "economic government" with a president elected for 2-1/2-year terms.
"We believe today's press conference lays the groundwork for European fiscal union," said Douglas Borthwick, managing director of Faros Trading. "The ingredients must be gathered before the pie is baked, and this is exactly what France and Germany are lining up with their discussions."
Sarkozy said their proposal that euro zone governments should enshrine deficit-limiting rules into their constitutions would be obligatory, not optional.
The question is whether all 17 current members of the euro zone will be able to live within tight fiscal rules.
THE UNTHINKABLE BECOMES THINKABLE
If there is one lesson above all from the euro zone debt crisis, it is that measures that have been all but ruled out, quickly come back onto the table when markets force the issue.
The parallel point is that the piecemeal approach of Europe's leaders to the crisis has never allowed them to get ahead of the game. Instead they have tended to respond in a way that investors have quickly concluded is too little, too late.
Investors turning their fire on Italy and even France in recent days prompted a flurry of activity, including the European Central Bank overcoming internal opposition to buy Italian and Spanish bonds.
But few see that as anything but a stopgap measure.
"Each side is surrendering some sovereignty which in the end could pave the way to much closer political union and so prepare the ground for the issue of euro bonds," said Julian Callow, senior economist at Barclays Capital in London.
The trouble is that electorates in northern Europe, fed up with helping out the south, will only tolerate so much.
A poll last week showed nearly two in three members of Merkel's own conservative bloc are unhappy with her policy, including agreeing to a second bailout of Greece.
And figures out on Tuesday showing German growth virtually ground to a halt in the second quarter will make the political environment even tougher.
"Anyone expecting this meeting to launch euro bonds was not paying attention to the state of political opinion or indeed to the kind of compromises needed for that to happen," Callow said.
In the end, Merkel may have to face the choice of electoral wrath at home or the legacy of being a leader who presided over the slow decline of the European project.
(Editing by Susan Fenton)