Leading article: Europe must confront its real economic problems

George Papandreou seems to have decided that the best form of defence is attack. The Greek Prime Minister was in Washington yesterday to lobby for a regulatory crackdown on hedge funds and currency traders who, he argues, are betting vast sums of money on his country defaulting, something which jacks up Greece's interest rates and thereby makes such a fiscal crisis more likely.

There is a powerful case for better regulation of some sections of the international capital markets. Credit insurance instruments should be traded on central exchanges to make the distribution of risk more transparent. And the wider social benefits of so-called "naked credit default swaps" (the financial equivalent of taking out an insurance policy on your neighbour's car) are far from clear.

But Mr Papandreou is kidding himself if he believes that speculators are solely responsible for Greece's woes, or even the driving force behind it. Responsibility lies with Greece's high deficit, the short maturity on its stock of debt, its contracting economy and its record of dishonesty over the scale of its borrowings. It is true that Mr Papandreou's attack on speculators has been encouraged by Paris and Berlin who have always disliked the "Anglo-Saxon" financiers. Yet this too smacks of a displacement activity; a handy way to divert attention from the eurozone's broader problems.

In fairness, there has been some movement on the bigger picture too. The idea of a "European Monetary Fund" which would have the power to lend money to financially stretched national governments such as Greece has been floated. Yet the German Chancellor, Angela Merkel, has poured cold water on the idea by warning that the creation of such a fund would require a new European treaty. The last time Europe tried to negotiate a new treaty was not a happy – or short – experience.

Chancellor Merkel seems to be hoping that credit markets will calm down about Greece's debt without Germany being forced to make an explicit commitment to put its hand into its pocket. Her caution is understandable. German voters do not want to be forced to pick up the bill for financial profligacy among their southern neighbours. And there are tentative signs that Chancellor Merkel's hopes are being realised, with the interest rate on Greek bonds dropping in recent days in response to news of the EMF plan and a new austerity package from Mr Papandeou.

But it would not take much for the markets to turn again, especially if Mr Papanderou's government runs into more popular resistance on retrenchment. Germany still needs to send a strong signal to investors that Greece will not be permitted to default. Work also needs to begin on sorting out the eurozone's chronic economic imbalances. This means not only addressing the profligacy of certain states, but also the destabilising frugality of Germany.

The hard reality is that it will be next to impossible for nations with persistent current account deficits such as Ireland, Spain and Greece ever to return to economic health unless surplus eurozone nations like Germany take action to stimulate domestic demand. Europe needs fundamental reforms to its labour markets and a major shift in internal demand. This is not about appeasing speculators, but ensuring the very viability of the European currency union.