More dithering by the EU imperils France, Germany

Harold Macmillan, the former Conservative prime minister, when asked what represented the greatest challenge for a statesman, replied: "Events, my dear boy, events." Events now threaten to overwhelm attempts to contain and solve the European sovereign debt crisis.

The EU meets today to "urgently" deal with the situation.

The meeting represents an increasingly narrow window of opportunity for the EU to try to regain control of a position that threatens to spiral out of control. The required actions, political and economic, are fairly straightforward, although difficult.

A debt restructuring plan for Greece, Ireland and Portugal needs to be drawn up and implemented. A significant portion of the current debt would be written off, to enable the countries to have some chance of attaining solvency.

All lenders, private-sector banks and investors as well as official lenders, must bear the losses. Debt restructuring should entail lengthening the maturity of debt and renegotiating terms to try to ensure the ability to service the debt.

All relevant countries must announce measures to support their banks, as required, to prevent losses on sovereign bond holdings from setting off a European banking crisis. Governments would stand ready to subscribe capital to banks or guarantee bank deposits and borrowing.

The European Central Bank, which is itself heavily exposed to the peripheral economies, may require recapitalisation and financial support.

In the case of Greece, Ireland and Portugal, government support may need to be backstopped by the EU or stronger eurozone members to be able to finance such commitments.

Efforts to arrest contagion should be directed at Spain and Italy. The countries will have to implement credible efforts to bring public finances under control and ensure the solvency of their financial institutions. Existing facilities, such as the European Financial Stability Fund or its planned successor the European Stability Mechanism, may need enhancement and expansion to become a viable emergency backstop supporting these countries.

All this is merely prelude. The primary problems of European growth, intra-European financial imbalances and competitiveness of some countries will also need to be addressed. Europe will either need to move to greater financial and economic union or restructure its monetary and currency arrangements.

Greater integration will require sacrifice of national sovereignty. It will also require a cultural shift; northern Europeans will need to become southern (spend more, save less) and southern Europeans will need to become northern (spend less, save more). It will need to embrace an even greater degree of "transfers" and support from the stronger eurozone economies to the weaker members. The political, economic and social problems of such a strategy are formidable.

The alternative is a radical restructure of the euro and eurozone. Some countries would, in all probability, leave the euro, reintroducing their own currency - a considerable challenge. One commentator has suggested this would be a temporary "sabbatical", probably for the next 100 years or so. The resulting devaluation of the new currencies would help these countries regain competitiveness through the reduced domestic cost structures.