THE medicine was powerful, but its effects are wearing off. For most of this year the euro has been sustained by the European Central Bank's injection of more than €1 trillion ($1.3 trillion) in three-year money into Europe's banks. This liquidity rush has averted the immediate risk of bank collapses or a sovereign default. But it also seems to have lulled some European politicians into believing that they can now sit back and see what happens. That they are wrong has become clearer as the benefits of the ECB's intervention fade. Yields on Italian and, especially, Spanish debt have been rising once again. Spain's ten-year bond yield recently went over 6%, an unsustainably high level. In short, the euro crisis is back; and this time it is not because governments in Europe's peripheral economies have flagged in their fiscal tightening and reform efforts. Spain has embarked on huge budget cuts. Italy, despite some compromises, is still close to a big labour-market overhaul. The real reason why the crisis is back is because the remedy is insufficient. In recession, fiscal austerity is now serving mainly to make weak economies even weaker. And there is still no coherent plan for addressing the single currency's structural faults, notably the national oversight of banks and the lack of a lender of last resort to governments. To change this, Europe's policymakers need to do two things: find a better macroeconomic mix; and start moving towards joint liability for both sovereign bonds and big banks. The misguidedness of today's austerity obsession is clearest in Spain (see article). Unlike Greece, its problems did not start with fiscal profligacy. Spain's mess, like Ireland's, stems from the bursting of a huge credit and housing bubble. Relying on austerity alone, in a shrinking economy after a huge private-debt bust, is a recipe for deflation and depression that could easily end up worsening the underlying fiscal position.

The problem is mainly to do with scale and timing. Fiscal tightening is both inevitable and desirable (including in Spain and Ireland). But tightening should take place over a longer period, and more should be done now to offset its effects. The European Union's structural funds and the European Investment Bank could promote more investment. And the ECB's monetary policy needs to be looser. The ECB's inflation target is “close to but below 2%”, but the IMF's latest forecasts suggest euro-zone inflation will fall to 1.5% in 2013. The ECB should cut interest rates further and, if necessary, use quantitative easing. Germans will have to learn to tolerate slightly higher inflation at home if the zone's overall inflation is to be kept at the appropriate level while peripheral economies adjust.

A euro zone needs a Eurobond, of some sort

A more balanced macroeconomic policy mix could help to put the euro zone back on the path to growth. But it will not be enough on its own. That is because two underlying, and related, weaknesses in the single currency remain unresolved. The first concerns the euro zone's banks, which sprawl across national borders but are backed by local deposit insurance and resolution regimes. This mismatch leaves governments vulnerable to the fate of their often outsized banks. The second concerns sovereign bonds. The euro zone has no continent-wide safe asset akin to America's Treasury bond and no obvious mechanism for fiscal risk-sharing. This makes it hard to see how the peripheral economies' bonds can return to permanently sustainable low yields.

The answer is to shift more (but not all) responsibilities and liabilities from national to euro-zone level. So with the banks, a euro-zone system for deposit insurance for big financial institutions (and for rescuing them if they get into trouble) can co-exist with national schemes for small ones. Any euro-zone scheme must not undermine the EU's single market in financial services, which includes non-euro countries like Britain.

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As for sovereign bonds, joint liability should also be limited. The best solutions involve mutualising only part of any national government's debt (see Free exchange). And any move towards such Eurobonds must balance the need for a common safe asset for all with the dangers of moral hazard. Spain needs cheaper money; but Spaniards should not think that all their debts will now be covered by the Germans.

Finding a way through all this will be hard—perhaps too hard. But right now the euro zone is not even trying to clear the thickets of technicalities. Blame politics and complacency. Germany's government remains implacably opposed to any talk of Eurobonds. Even the most cash-strapped euro-zone countries, such as Spain, are loth to see foreign intervention in their banks. Such opposition will not be overcome quickly: creating the right financial, fiscal and democratically accountable institutions to match Europe's single currency will be a long haul. But the only way to quieten markets is to put these reforms on the agenda.