(Reuters) – Bill Clinton famously won the U.S. presidential election in 1992 with the motto “It’s the economy, stupid.” But when it comes to the future of the euro, “It’s the politics, stupid!” is the more appropriate slogan.

Since its inception, the single European currency has always been as much a political as an economic project.

The euro has come under attack on financial markets this year because of debt and deficit problems in its weaker southern members, most acutely in Greece but also in Portugal and Spain, and growing economic imbalances among its 16 nations.

But the history of the 1990s shows that investors who bet against European monetary union can get their fingers burned.

While political mistakes could yet undo the 11-year-old monetary union, it is far more likely that Franco-German political leadership will save it.

“If the euro fails, not only the currency fails. Europe fails too, and the idea of European unification,” German Chancellor Angela Merkel said in a May 13 speech. “This test is existential — it must be passed.”

In Paris, too, the political will to do whatever it takes to underpin the euro is absolute.

President Nicolas Sarkozy may have been impatient with Merkel’s slow decision-making during the crisis, and too eager to claim political credit for giant rescue packages for Greece and the wider euro area.

But he has moved a long way toward supporting German calls for stricter sanctions to enforce budget discipline in the euro zone, even calling for a German-style constitutional amendment in France to anchor a commitment to deficit reduction.

PRIMACY OF POLITICS

Merkel has talked repeatedly of the need to restore “the primacy of politics over the financial markets” to justify her support for a $1 trillion reserve fund to stabilize the euro.

Some of her own actions, under domestic political and legal pressure, have contributed to the crisis of confidence.

She delayed an unpopular financial rescue for Greece until contagion began spreading to other southern European countries. Her stark warning that the euro was in danger, meant to rally voter support for bailing out Greece, rattled investors.

And Berlin’s sudden, unilateral ban on certain speculative trades — driven by a need to show taxpayers that the government was acting against speculators — provoked exactly the kind of market turmoil it was meant to stop.

But Merkel can credibly argue that euro zone partners are now taking seriously Germany’s message that they must cut budget deficits swollen by the financial crisis and adopt painful pension and labor market reforms to mend their public finances.

In the last month, Greece, Portugal, Spain and Italy have adopted substantial public spending cuts. France has imposed a three-year freeze on extra spending and is debating raising its legal retirement age from 60.

A combination of bond market discipline and European peer pressure has made cuts or freezes in public sector pay, pensions and hiring politically feasible, despite trade union resistance.

The European Central Bank has eased the pressure on southern euro members’ debt by buying up government bonds.

The next stage is for finance ministers to pin down in detail next week how the $1 trillion stabilization mechanism will work in practice. The money would be lent on strict policy conditions to euro zone countries that were shut out of capital markets, as happened to Greece.

But the bigger test of political leadership will be to agree on new rules for fiscal and economic policy coordination.

“What needs to happen now is for France and Germany to sit down and thrash out an in-depth reform of euro zone governance, which won’t fully satisfy either side but will be acceptable to both and will thus become the template,” said Thomas Klau of the European Council on Foreign Relations, co-author of a history of the single currency.

Apart from stricter budget discipline and surveillance, the compromise should involve a procedure for managing an orderly default in a euro zone country, and a method for rebalancing the European economy between surplus and deficit countries.

Paris and Berlin would be well advised to involve their parliamentarians in the process, since the reform is bound to affect national budget sovereignty, Klau said.

“Despite the current cacophony of contradictory statements within and between governments, it is plausible that a consensus could be forged by October,” he said. “That may sound like a very long time to markets reacting in real time to each comment. But that is the way Europe is constructed.”

(Editing by Noah Barkin)