Angela Merkel’s approach to solving the Euro crisis misses the mark. While all around her, governments are toppled and a new class of European leaders prepares their people for more “blood and tears”, the German Chancellor still appears to believe that she can keep Germans shielded from the turmoil. By delaying an open debate on Eurobonds, and refusing to publicly signal that she would accept a massive intervention by the European Central bank (ECB) on bond markets, Merkel’s stance has had a familiar effect.

Once again, only a few days after a European summit, the varnish has begun to wear away and EU leaders look like they may be forced back to the drawing board sooner than they had hoped.

The summit was undoubtedly a political victory for Merkel. She has forced her partners (save for the United Kingdom) to accept her cautious step-by-step approach, now coated in the dramatic language of an integrated, tight fiscal pact. But the agreement failed to convince markets, because Merkel’s approach does not tackle the underlying and more pressing problems of this sovereign debt crisis, namely the inability of a growing number of EU nations to fund their country’s debt at sustainable interest rates.

Even after the latest summit, the markets remain at odds with Merkel. While, for domestic reasons, the Chancellor still needs time, for both financial markets and the United States administration, the crisis can only be contained by a firewall of liquidity now. Markets need the reassurance that their investments will not suddenly become worthless. And the White House wants to prevent a never-ending crisis in the euro zone from jeopardizing President Obama’s hopes of re-election.

However, Merkel is apparently ignoring such concerns. Instead she focuses on closer fiscal integration, which unfortunately is nothing more than what the Financial Times calls “a stability pact on steroids.” As we argued in the last Advisor, the outlines of the fiscal compact agreed upon by 26 European Union (EU) leaders does little more than put on paper what is already happening on the ground. But even in its present form, the EU’s plan for a closer fiscal union should go hand in hand with the introduction of Eurobonds. Building one without the other is like putting a new car on the road without providing it with the necessary fuel.

Regrettably, due to the British veto, the pact will stay outside of the Lisbon treaty, which defines the role and powers of EU institutions. Prime Minister Cameron’s decision to veto the fiscal compact will have the unintended consequence of making it easier for Merkel to stick to her vehement opposition to Eurobonds. She has calculated that she must avoid making a decision on what is a very thorny subject for at least two more years – Germany takes to the polls for its national election in late 2013. While many partners continue to talk about Eurobonds as one necessary answer to the crisis, she has now successfully reframed the debate almost exclusively around the need for a tighter fiscal regime.