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There are three ways to read the eurozone’s focus on austerity.

The first is that its leaders genuinely think that is rooted in non-observance of the stability pact. But it is hard to believe that this could apply to countries such as Spain or Ireland, which always stuck to the rules. The second is that treaty-based discipline is the precondition for a fiscal union and the issuance of eurobonds. But is it wishful thinking enough to commit to retrenchment without any certainty that the next step will come?

The third is that consolidation in southern Europe is the cornerstone of a broader strategy of economic reforms, which in turn will contribute to competitiveness. It is hoped that governments caught between market pressures and fiscal tutelage will realise that the only path to economic growth is to implement long-delayed structural decisions. Seen in this light, austerity is not (or not only) an end in itself but also the driver of a broader transformation. The question is, can it deliver?

Buffers from market pressures can indeed slow down reforms. This was vividly illustrated last August when Rome backtracked on tax reform commitments a few days after the European Central Bank . However, austerity and reform are not always complementary. Germany implemented reforms under Gerhard Schröder (but without austerity) in the 2000s, and then austerity under the Merkel-Steinmeier coalition (but without reforms). Governments under extreme intense pressure may have no choice but to do everything at once, but when political capital is scarce, prioritising fiscal consolidation is usually at the expense of reforms. Reforms may also involve budgetary costs, if those who lose from them need to be compensated.

Governments also need to show their citizens that effort pays. If, after a few quarters of fiscal adjustment and painful reform, the situation and outlook are only worse than they were before, reform-minded coalitions may wane or lose power. Risks are compounded by simultaneous retrenchment in several countries at once. Southern Europe plus France, which is also in need of budgetary adjustment and structural reform, accounts for more than half of the eurozone’s gross domestic product. Keeping the pressure on will only be a credible strategy if accompanied by an effective growth programme for the entire eurozone.

The first component has to come from supportive ECB policies. The central bank has acted forcefully on liquidity support but has not yet outlined its monetary stance. As growth falters, it should cut its policy rate further and let it be known that it intends to keep it low. Consequently the exchange rate may weaken, triggering more external demand and higher domestic inflation in northern Europe. As long as average inflation remains close to two per cent, these developments should be welcomed, because they contribute to the process of internal adjustment. What the eurozone needs in the years to come is inflation at two per cent on average, but more than this in the north and less in the south.

Second, the European Commission should make it clear that countries must commit on budgetary efforts, not outcome. When growth is slowing, the right approach is to stick to a medium-term retrenchment path, not to stack successive packages with the aim of . Too many countries, starting with Spain and France, are committed to hitting unrealistic headline targets in 2013. Markets suspect this won’t happen. It’s high time to acknowledge it. There should be no relaxation of efforts, but no fiscal overkill either.

Third, the type of adjustment being enacted matters greatly. The emergency consolidation plans introduced throughout Europe since last summer have in general been biased towards short-term fixes, such as tax rates increases and indiscriminate spending cuts, which are detrimental to medium-term growth. The EC should monitor the composition of adjustments and insist on pro-growth packages based on selective cuts and supply-friendly tax reforms. It should accept that reforms may slow down the pace of adjustment.

Fourth, the European Union should mobilise the array of instruments at its disposal – from its budget, including regional development funds and social funds, to regulatory policies and competition policy. It should also launch new initiatives to boost growth. Europe cannot afford to keep on running EU-level policies as if nothing had changed in its order of priorities.

Protracted recession in southern Europe would soon put the single currency in danger. Having opted for a strategy of adjustment and reform, the eurozone must now do all it can to give it a chance to succeed.

A version of this comment was also published in the Financial Times A-List under the title "Europe’s fiscal strategy is self-defeating".