Alarm over Europe's financial predicament is surging again. The immediate cause is the European Union's fiscal pact. The pact is proving so unpopular that it's undermining governments, and not just in the peripheral countries most obviously at risk. The stresses caused by the EU's strategy influenced presidential elections on Sunday in France and forced Dutch Prime Minister Mark Rutte to offer his cabinet's resignation on Monday.

There will be some crowing about this. The Netherlands has been Germany's leading ally in the EU, calling for stringent budgets and criticizing the fiscal self-indulgence of Greece and other sinners. Now it has choked on its own efforts to comply, making Rutte the latest of about a half-dozen European leaders to be unseated by the financial crisis.

This new political turbulence is spilling over into financial markets, threatening a vicious circle of worsening economic stress and political risk. The Netherlands' sovereign debt position is strong - it enjoys an AAA rating, despite concerns over high levels of household debt. But Spain remains the country to watch and it might settle the EU's fate. If it goes the way of Greece, the EU's financial defenses would probably be overwhelmed, and the wider global recovery would again be in peril.

Too much austerity

That doesn't need to happen, but the fiscal pact makes it more, rather than less, likely. In countries without recourse to monetary easing or currency devaluation, the strategy demands too much austerity too soon.

Spain's new government has made brave budget cuts and under the most difficult circumstances is carrying out long-overdue labor-market reforms. But there must be a limit to Spain's tolerance of such acute economic pain. The EU should stop testing it.

Without compromising on long-term fiscal control, the Spanish government needs to ease the short-term fiscal pressure, and the EU should help it do so. The way to do this is through formal pooling of fiscal risk. The European Central Bank must explicitly promise to be a lender of last resort to euro-area sovereign borrowers, or the EU must introduce some form of euro bond or other collective borrowing arrangement. This would reduce Spain's borrowing costs to a level consistent with solvency.

Such a plan would be the very fiscal union Germany has opposed. Germany should consider that its choice might come down to this: fiscal union, with the costs it implies for German taxpayers; or economic collapse in some countries, renewed contraction in others, and political turmoil spreading across the union. In either case, Germany pays - but in the second case, it pays much more.