Op-ed: Austerity is not enough

With the Greek problem still unresolved, the next move for Europe is to establish a firewall that blocks contagion from breaking out in the rest of the peripheral countries, particularly Italy and Spain, the two countries that are too big to bail out.

In the past few days, the Spanish risk premium has rallied slightly, a change that the EU interprets as a sign that Italy and Spain's destinies are aligning. Van Rompuy has asked Spain to finalize and announce its reforms before the European summit scheduled for January 30.

That request has placed big demands on Rajoy and his ministers. In exchange, the Spanish are considering whether to ask the EU if it can give Spain two years to meet a national deficit goal of 3% of annual GDP so that this year Spain will not have to focus entirely on the brutal labor involved in cutting its debt from 8% to 4.4%. It would be reasonable for the EU to approve Spain's request considering that yesterday the Bank of Spain confirmed its predictions that Spain's GDP would plunge 1.5% in 2012 and employment would fall off just as much.

The Franco-German axis should reconsider its strategy, because the weight of austerity measures could cause other countries to end up like Greece. Lagarde said yesterday that a liquidity crisis is becoming a solvency crisis because nobody is erecting the barriers necessary to calm the markets. For now, European Central Bank (ECB) aid is working. But if everything is left up to a recovery fund with scanty resources, then we will start steadying the ship again as it pitches along in a turbulent recession that austerity aggravated.