Eurosceptics, many of them in the UK, have so far rejoiced at the crisis in the eurozone, believing it has proven that they were right all along – a monetary union without fiscal union makes economic nonsense. The crisis, say the eurosceptics, exposes the euro as a largely political project.
They may be right about this. But before they get too carried away, they should consider the likely outcome of the current malaise: federal Europe in fact rather than in dreams.
Ushering in this reality is going to be a very messy business as Germany will resist the inevitable as long as possible. But with highly indebted nations such as Ireland and Greece facing debt restructuring or further bailouts, a fiscal union will appear as the only viable option.
Eventually, market pressures are going to bring together two constituencies presently united in opposition to a federal Europe – the voters in Ireland, Portugal and Greece who do not wish to give up any more of their sovereignty and the voters of Germany who do not want to bail out peripheral Europe.
Since both sets of voters are against a federal Europe, the route to this outcome will have to be disguised and largely accomplished by the back door.
Bigger bailout fund
There is already discussion of a much bigger bailout fund than the current €750bn European Financial Stability Facility. International investors are already confused about the various components of this, all with similar acronyms, as well as how pan-European bond issuance differs from that of single countries.
The prospect is of a bigger fund – €2000bn – able to issue eurozone sovereign bonds as a joint liability of all eurozone states (investors will understand this) and with powers to bail out banks as well as sovereigns.
In return for effectively using the German sovereign guarantee to run an EU debt agency, Berlin will, for sure, demand a much greater say over Irish tax and Greek spending policies. Greek and Irish voters may in return demand more accountability through a more powerful European parliament. Result: European federalism has arrived by the back door.
