My first reaction is - good luck with that. Events today in Greece suggest it is entirely fanciful to imagine that such a fiscal union could ever get off the ground. Inviting countries that are suffering the worst crisis for the best part of a century to give up what is left of their political independence is an ambitious project indeed. Actually, for ambitious read ridiculous.
But quite apart from the practicalities, it is the wrong objective for a whole host of reasons.
First, not satisfied with designing a currency union which tried (and failed) to control some risks (government deficits) but ignored much bigger ones (volatile capital flows), the Franco-German leadership wants to entrench the same mistake in a much more rigid fiscal union. Worse, it would be a pro-cyclical fiscal union, focused mainly on preventing governments from intervening in slumps. The last three years have demonstrated that it is completely stupid to try to balance budgets in a recession. So Merkel's response is to prevent anyone from opting out of the stupidity.
Second, this institutional design, as well as being bad for everyone, is also worse for some member states than others. So Germany and France will be required to do next to nothing, whilst the GIIPS countries will have to jump through flaming hoops. Guess which member states have the most power in the EU? Well, that would be the ones who won't be required to make any sacrifices. Funny that.
Third, and perhaps most important, does anyone seriously think such measures could win popular support? I'm pretty sure Merkel is under no illusions. So that means yet another backroom deal which Europe's beleaguered leaders will then have to foist on their electorates as a fait accompli. Only this time, governments are not just unpopular, they have lost all authority to ask for sacrifices. Syntagma square here we come.
So in short, we have a proposal which is undemocratic, economically insane, and can only work if the EU drops any pretence that there are EU member states that matter, and EU member states who just have to suck it up.