Europe's dizzying cycle of crisis, recovery and crisis again may finally have reached its limit. Panicky depositors are fleeing Greek and Spanish banks, sceptical investors are pulling their money out of the eurozone, and high-level financial experts are warning in increasingly dire terms that the European Union is quickly running out of time to head off a collapse of the currency.
It’s against this threatening backdrop that European leaders are laying plans for deeper economic integration, ceding to Brussels more power than has ever been seriously considered before.
‘More Europe, not less’
The fundamental flaw in the design of the eurozone is that while the 17 countries share the common currency, they lack common fiscal policies or institutions. Liabilities are shared, responsibilities are not – leaving countries on the hook for decisions they had no hand in.
As head of Europe’s largest and strongest economy, German chancellor Angela Merkel has insisted for months that the price for loosening German purse strings, to help its less solvent neighbours, was "more Europe". For Merkel, that means handing over more decisions on national budgets and spending to European institutions, to enforce a discipline that national governments seem unable to muster. Six months ago, that urge to impose discipline led to the “fiscal compact” that bound countries to strict limits on deficits – a pact Irish voters reluctantly just agreed to.
But with severe cutbacks making themselves felt across the continent, and most of Europe slipping back into recession this spring, citizens have quickly lost their appetite for austerity. More economists have been arguing that to slash government spending when the private sector was cutting back was self-defeating. Merkel’s partner in austerity, the former French president Nicolas Sarkozy, was defeated by the socialist Francois Hollande, who was carrying the banner of “growth”. Emboldened by Hollande’s victory, many national leaders, along with heads of EU institutions, have rallied to that flag, leaving Merkel suddenly on the defensive.
Everybody into the pool
Now, an impending Spanish bank meltdown threatens to overwhelm the backstop mechanisms Europe put in place just last year. Proposals are being drafted for binding European economies more tightly.
This time, the aims include the creation of a unified European banking system, with eurozone-wide deposit insurance, regulations and oversight. One proposal would “pool” an estimated $3tn of bad government and bank debt, to be paid off over 25 years. The hope is that getting that debt off the banks’ books will keep them from dragging down their national governments: both Spain and Ireland are in trouble primarily not because they overspent their budgets, but because they took on their banks' debts after real estate bubbles burst.
These kind of shared-debt arrangements face formidable legal – not to mention political – obstacles. And designing new federal structures in Europe, and getting them to work will take years: time the eurozone may not have. But as the world's largest economic bloc looks increasingly wobbly, European leaders seem ready to consider options that were previously unthinkable.
Further reading: Ezra Klein asks in his Washington Post blog: Can't we have 'just enough' Europe?