AS WEDNESDAY’S European financial summit approached, the continent’s leaders squabbled as if the European Union had never existed: French President Nicolas Sarkozy snapped at his English counterpart, Prime Minister David Cameron. TV cameras recorded Mr. Sarkozy and German Chancellor Angela Merkel smirking at the latest factional uproar in Italy. Enraged, Italian Prime Minister Silvio Berlusconi declared: “No one in the E.U. can nominate themselves commissioner.” Of course, someone leaked a recording of Mr. Berlusconi’s purported vulgar comments about Ms. Merkel’s appearance, so maybe that was why she was annoyed with him — along with the fact that he has failed to deliver the economic reforms Germany demands in return for its financial support.

These leaders have to get a grip on the situation soon, or else investors may finally pull the plug on the continent’s sovereign debt, bringing down the E.U.’s biggest banks with it. The United States, whose money market mutual funds are interconnected with Europe’s banks, would not escape such a meltdown unscathed. This is why the Obama administration has been urging Europeans to put together a bailout fund big enough to convince investors that their money is safe in Europe. Germany, the only country capable of underwriting such an undertaking — it might cost $2 trillion — has balked. The latest reported plan would use an existing $600 billion fund to bail out Greece and write down its debt by about half, pump $140 billion into banks to cover their losses, and offer private investors who agree to buy the debt of Italy and Spain protection against losses. Among the many details that still aren’t clear: whether the $600 billion really can be lawfully “leveraged up” to this extent, and whether the Europeans are still understating the banks’ probable capital needs.

Europe would not be in this mess if it had a joint fiscal policy to go with its currency union. And yes, irresponsible fiscal policy and unaffordable welfare benefits in certain countries, Greece especially, are to blame. No doubt the Greek public sector, like that of Italy, Spain and Portugal, is grossly inefficient; this crisis is an opportunity to right-size and privatize.

Yet in a real sense Europe’s debt emergency is the product of what Zsolt Darvas and Jean Pisani-Ferry of the Bruegel Institute in Brussels call “Europe’s Growth Emergency.” For many years, Europe’s growth rates have lagged those of the United States and emerging markets, forcing it to borrow more and more to maintain its standard of living. To some extent, slow growth reflected a conscious preference for leisure and generous social benefits. But, as Messrs. Darvas and Pisani-Ferry note, you cannot neglect productivity forever without putting “the sustainability of the (already precarious) European social model . . . into question.”

Austerity, Germany’s prescription for Greece and its fellow debtors, only shrinks the numerator in the debt-to-GDP ratio. You need to enlarge the denominator, too — lest these countries be condemned to endless recession and political unrest. With the usual path to adjustment — currency devaluation — closed, productivity must be boosted through structural reforms. That means not only raising retirement ages, as Germany demands of Mr. Berlusconi (and as he is actually trying to do, against opposition from within his ruling coalition). It also means sweeping away the tangle of outmoded regulations, protectionist policies and labor-market rigidities that hamper business in Southern Europe — and in countries farther north, such as France, for that matter.

Even that won’t work unless competitive countries such as Germany de-emphasize exports and stimulate domestic demand so as to provide a market for their southern neighbors’ goods. In short, Europe is in for years of complex, often painful, economic adjustment. Difficult as the continent’s task is today, this may be the easy part.