Many observers of the Eurozone debt crisis argue that the Euro can only survive if the common currency is complemented by a fiscal union. But theres a problem with that: Fiscal union, mostly understood as a combination of centralized control over public finances with joint guarantees for government debt, is a fundamentally flawed concept. The political integration required to achieve it is not in sight. In order for a fiscal union to work, national governments including parliaments would have to give up the right to set taxes and determine public expenditure independently and accept a restriction of national sovereignty in other areas of economic and social policy. The debate about the fiscal compact has shown that most member countries, in particular France, are not willing to conform. This is an understandable position considering the absence of democratic control at the EU level with decisions made in Brussels about key issues like national taxes and expenditures, which directly affect most citizens, simply lacking legitimacy.A much more promising approach than fiscal union would be to focus on a Europeanization of the banking sector. This would require a complete shift of banking regulation and supervision to the European level and the creation of a European bank resolution mechanism. A key aspect of this Europeanization would be that banks would no longer be allowed to hold as many domestic government bonds as they do today. Politically, a Europeanization of the banking sector would also require countries to give up sovereignty, but in the area of banking regulation and supervision, which is rather technocratic and more remote from day-to-day concerns of ordinary citizens. It would be politically much more acceptable to delegate this task to an independent European body like the European Central Bank than to relinquish the right to set fiscal policy.One of the key difficulties in overcoming the Euro debt crisis is that the current financial system is characterized by a close symbiosis between national governments and national banking systems. The situation in Spain offers a good example. The Spanish banking system is plagued by huge and unrealized losses from the financing of the real estate bubble. At the same time, Spanish banks are massively invested in government bonds and the Spanish government puts pressure on Spanish banks to buy more bonds if funds are available. This undermines the ability of the banking system to provide credit to sectors which might contribute to an economic recovery. Financial difficulties of the Spanish government threaten the stability of the Spanish banking system and vice versa.A Europeanization of the banking sector would improve the Eurozone situation. Since banks would be less exposed to their national governments, financial sector stability would be less endangered if a national government has financial problems. In addition, the finances of national governments would not be endangered by problems of national banks, because collapsing banks would be restructured or recapitalized at the European level, rather than threatening to draw their national governments into bankruptcy. Providing funds at the European level is possible because control over, and supervision of, the banking system also takes place at the European level. In the US, for instance, financial problems of the state of California are less dramatic for Californian banks because their activities and asset holdings are more diversified across the US. If a bank faces financial difficulties, funds required to restructure or recapitalize the bank would not have to come from the California government, but rather from a federal institution.Europe is debilitated by the effects of two years of desperate crisis management. The prescribed treatment resembles the old practice of bloodletting on ailing patients. Growing debts are paid with more loans, and new loans are made dependent on increasingly severe austerity measures. The results are a greater risk of recession, higher interest rates on refinancing loans, and the need for runaway financial aid to the southern eurozone countries. Greece is a dramatic portent of the direction things could take. Record-breaking unemployment of over 22% in Spainand record interest rates on Portuguese bonds show that the crisis fever is far from abating. Portugal, Spain and even Italy have still not managed to extricate themselves from the downward spiral of recession and debt. It is a vicious circle that increases the risk of a split in the eurozone something that would have been unthinkable in 2009.It has taken two years of futile efforts for governments to finally start talking about growth and employment as European aims again. This change in attitude is prompted by shock. The credit-rating downgrades for France, eight other eurozone countries and theEuropean Financial Stability Facilitybailout fund at the start of the year all show that the capital markets are predicting a downward spiral. It was particularly insightful to see how Standard & Poor's justified the downgrades: "We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues."We need to set a new course now and implement a far more consistent and precise strategy. First and most importantly: the current situation requires us to create the right conditions to ensure private capital flows into the real economies of crisis countries. For this to happen, there needs to be a guarantee that these crisis countries and their banks can pay their debts from a robust European Stability Mechanism, which can provide itself with liquidity from the European Central Bank, and a common debt-reduction pact as suggested by the German Council of Economic Experts. Growth needs private investment, and these investments need security!Secondly, we need to remove any obstacles to investing in Europe and give hope for an upturn in the economy in order to bring back hesitant private investors who have lost confidence. Our most important task is therefore to create a comprehensive European investment programme, which will increase the competitiveness of crisis countries, expand Europe's industrial infrastructure particularly its energy networks and promote research and development. In order to ensure that the momentum of change is not lost in excessive red tape, the European Investment Bank must play a central role. A crucial aspect of the project is that it will not be financed by new debts, but by a European financial transaction tax, which could bring in up to 50bn ifEurope or at least the eurozone is united on the issue. For European solidarity has two meanings and it is time to show we are committed to both.Taxing financial markets, promoting research and development, and mobilising investments: that means learning our lessons from the financial market crisis and changing our focus. "It's the real economy, stupid!" is a call now even heard from Anglo-Saxon nations. For a decade "industrial policy" was one of the most unfashionable terms in politics. But we are now done with bowing to the demands of the financial industry. Germany's strength the strength that has made us the anchor of Europe is the result of many years of hard work to maintain and modernise industrial production. It is also the fruit of our refusal to follow the trendy yet mistaken teachings of London and Davos, which accelerated the flywheel of the financial markets by a few rotations each year. We want less subjugation to a system of mere value absorption and more respect for the laborious process of value creation this demand does not come from Occupy Wall Street, but from the management boards of German industrial companies. We must recognise the larger global challenge that lies beneath the European financial market and debt crisis. China will have overtaken the US in terms of gross domestic product by 2020. Europe's demography is developing towards a smaller working population in an ageing society. Resources are becoming scarcer. If we want to promote new growth, we should focus on the quality of the value we are creating. GDP growth at any cost and quick financial market profits at the price of bad working conditions and a wasted environment is not a solution, as recent news like that ofSchlecker's bankruptcyhas shown us once again.Europe has the potential to pioneer and supply a sustainable worldwide economy. Achieving this means addressing the major global challenges: keeping healthy well into old age, using energy efficiently and from renewable sources, and ensuring mobility while fossil fuels become scarcer and more expensive. These problems require real solutions. To find them, we need excellent researchers, developers, engineers and specialists. The economy of the future needs an industry of the future. In the global division of labour, Europe's role must be to conceive, develop and provide new products for a sustainable economic model built to ensure the prosperity of almost 9 billion people. That is the current state of the European dream.

Crucially, the Eurozone comprises a number of heterogeneous economies and is almost certainly not an Optimal Currency Area (OCA). Each country has its own economic structure, its own institutions, and its own set of fiscal policies. Individual member states gave up control of important macroeconomic policy levers such as monetary and exchange rate policy when the Euro was adopted. These key policy levers were not adequately replaced and this left individual member states particularly vulnerable to asymmetric shocks and to divergences in competitiveness. But this does not imply that full fiscal federalism is a necessary requirement of a successful monetary union. A commitment to fiscal union is unnecessary. Instead, what is required is a centralised insurance fund to ameliorate the impact of recession and severe asymmetric shocks, combined with intergovernmental coordination of policies to prevent competitiveness and fiscal imbalances from growing too large. An inter-regional insurance scheme to provide fiscal transfers in a counter cyclical manner could be funded by a pan Eurozone consumption tax hypothecated for and paid directly to the centralised insurance fund. The fund would be mandated to run a surplus over the economic cycle and could be called upon under strict guidelines to provide direct fiscal support on a temporary basis to countries suffering recession or a severe asymmetric shock. The funding should be automatic subject to the conditions and terms of access agreed annually by Eurozone governments.