Europe's heads of state have done a lot of summiting and dealmaking of late. Greece has voted more austerity. But on balance theresults have disappointed again. The only genuine help for Europe'ssovereign debt troubles has come from the European Central Bank(ECB), which at last has begun to provide markets much neededliquidity. Otherwise, Europe's leaders, though they have managedsome action, seem incapable of thinking broadly enough even tobegin grappling with the continent's underlying problems.

For all the deep problems facing Europe—questions of default, ofmembership, of its basic political-economic model, even of thebiases built into the euro—the continent's summiteers have kept aremarkably narrow focus. They have considered just two things, infact: (1) how to enforce haircuts on the holders of Greek debt and(2) how to enforce fiscal austerity. Though such matters areimportant and help for Greece hinges on their resolution, they arenonetheless a relatively small part of Europe's problems. UntilAngela Merkel, Nicholas Sarkozy and other European leaders expandtheir focus to deal with the fundamentals, markets and investorswill show no confidence beyond that evoked by the ECB. Yet, ratherthan broadening the scope of their concerns, Europe's leaders havefailed even to reach agreement on the narrow goals with which theyseem so wonderfully preoccupied.

On the matter of Greek bond values, they have talked privatebondholders into swapping their existing holdings for only halftheir value in new, longer-term bonds. Since private entities holdjust under 60% of outstanding Greek public debt, this haircut wouldcut the overall burden of outstanding Greek government bonds byalmost 30%, bringing it down to about 115% of the country's grossdomestic product. But they have accomplished a little more. Thoughthe ECB has agreed to suffer a haircut, the exact extent and natureof the deal remain ambiguous. Substantial dispute remains overwhether the International Monetary Fund (IMF) should take a loss.There is also disagreement on the size of the coupon attached tothe new debt. The Germans and the IMF want a low figure below 3.5%to ease Greece's financing burden. Private holders want a couponcloser to 4%.

On the other, admittedly larger issue of enforced austerity,confusion reigns. The outlined agreement would force each countryto keep its budget deficits below 0.5% of GDP over the course of aneconomic cycle. It would also limit each country's outstanding debtto 60% of GDP. The rule would impose fines of up to 0.1% of GDP onviolators, though it would allow for exceptions under extraordinarycircumstances, for instance, when real GDP falls more than 2%.German Chancellor Merkel in particular has emphasized the need forenforcement and penalties. She is especially keen to supervise theGreeks, who, she claims with some justice, have violated austeritypromises in the past. Though France showed a distinct lack ofenthusiasm for the announced austerity regime, French PresidentSarkozy still claimed, against all appearances, that Europe'sleadership agreed. Meanwhile, the United Kingdom and the CzechRepublic refused to endorse the new rules.

If it is disappointing that Europe failed to agree on narrowissues, it is worse that its leadership has entirely ignored morefundamental concerns, such as growth. That's a major oversight withthe continent on the verge of recession and the deficit controlrules set to enforce considerable fiscal restraint. Though ItalianPrime Minister Mario Monti talked about growth, a one-sidedemphasis on austerity remains and could produce a vicious cycle inwhich spending cuts and tax increases so depress growth thatdeficits expand, demanding still more austerity that, in its turn,would depress growth and widen budget shortfalls still further.Europe could avoid such evils, even while exercising budgetrestraint, if it simultaneously pursued tax or labor market reform,for instance, or a reassessment of spending and regulatorypriorities, or even plans for privatization. But the summiting hasfailed even to mention these or other possible growthinitiatives.

Nor does Europe's leadership seem ready to consider the biasesbuilt into the euro. Many have decried the common currency forpreventing the kind of devaluation that might otherwise have easedthe strains on countries like Greece, Ireland and Portugal. EUleaders, of course, cannot consider such a route without utterlydestroying the euro. It is unfortunate, nonetheless, that they haveproceeded as if the euro had no clear biases. Primary is thedistortion caused by the highly divergent rates at which eachcountry joined. Because Germany exchanged its national currency foreuros at a cheap rate relative to its economic fundamentals, thecommon currency enshrined for Germany substantial export advantageswithin the eurozone, especially compared to Europe's periphery,whose nations joined the euro when their national currencies weredear compared with their competitive fundamentals. Without implyingthat this relative positioning was deliberate, the biasesnonetheless exist, deserve attention and, unless corrected, willmake the periphery's adjustments that much more arduous.

Until Europe's leaders address these and other fundamentalmatters, investors, bankers and others involved in this sovereigndebt fiasco will remain skeptical. Few can have any confidence in alasting solution when those presumably managing it offer onlypartial responses to narrow issues and effectively ignoreeverything else. Europe's strains demand more initiative andimagination than dubious efforts to centralize still more power inBrussels—or is it Berlin?