This article is co-authored with Frances Coppola, Associate Editor at Pieria.
While all eyes in Europe are focused on Greece, another major source of conflict is emerging that has much more profound implications for the future of the single currency.
Since its emergence the Eurozone has been split between those who believe that the region should move towards a single unified political union — the federalists — and those who believe that the autonomy of the nation state should remain paramount — the (small-n) nationalists. That division is looking set to become a schism as Europe moves past the acute stage of its crisis and begins to start looking at its future.
So what’s happened to thaw this frozen conflict?
One clear supporter of closer union is Jean-Claude Juncker, the new European Commission president. In a memo leaked to the Financial Times’ Peter Spiegel (he of the aborted Greece statement leak) earlier this week, Juncker outlined some key questions that the Eurozone must answer in order for its institutions to be fit for purpose.
In it he asks whether the Eurozone needs a new unified budget and a Eurozone parliament. He also raised the possibility of building more “common institutions” and questioned if “instruments are needed” to ensure that member states stick to structural reforms of their economies.
As he writes: “A renewed political consensus at the highest political level is necessary to proceed with those structural reforms which should be tackled as a priority across the euro area.”
Those may seem like harmless queries to the casual observer, but they represent the core of a debate on how the single currency prevents this type of crisis from being repeated. The lesson that learned over the past few years is that a monetary union in the absence of a fiscal union is fundamentally flawed. The humanitarian costs of this inefficiency are all too apparent in Southern Europe’s staggeringly awful unemployment figures versus core countries such as Germany.
There are two possible answers to this — attempt an orderly dissolution of the euro (something that has never been achieved on this scale before), or bind the countries within the monetary union closer together to allow money to be channelled to where it is needed most.
Many have noted that the euro crisis is not in fact a crisis of country vs country, but a sectoral and/or a regional problem. That may be true, but the administrative units within the union are nation states and the ability of national governments to arbitrarily decide whether to help their neighbours (and, indeed, themselves) carries with it substantial risks to the region's stability.
While Juncker’s Investment Plan for Europe was widely criticised for being too convoluted in its structure, it nevertheless asserted the principle that responsibility for providing investment where it is desperately needed should be given to supra-national bodies to manage.
The most important part of this proposal was not the contribution of EU funds, but the invitation to member states to provide capital, by borrowing if necessary: in an important concession, such borrowing would be separate from general government borrowing so would not threaten states’ compliance with Eurozone debt/GDP limits set under the Maastricht agreement.
Capital contributed by member states would then be leveraged by the European Investment Bank (EIB) through the issuance of what amount to Eurobonds — bonds issued by Eurozone institutions that are backed by all member states. And with the ECB providing a backstop (since it can buy EIB/EIF bonds), this would be a cheap and effective means of providing much-needed investment across the Eurozone.
But it needs the euro member states to participate and sadly, so far only one, Italy, has agreed to do so.
Germany, which is best placed to provide the necessary capital, refuses to participate. And therein lies the problem.
Juncker’s scheme has forced the debate over federalisation back to the surface. But it remains unclear whether he has sufficient support to push the agenda forward.
In particular, Berlin has proven deeply unwilling to cede any control over its economic policy to Brussels — which the launch of Eurobonds would necessarily entail. Risk sharing in any form remains anathema to the German administration, reflecting the opinion of a significant majority of the German electorate. For them, German sovereignty remains paramount.
The view in other countries – notably, though not exclusively, Greece - is very different. The new Greek administration has made it clear that Greece has no intention of leaving the Euro: on the contrary, it wants to strengthen and deepen Eurozone integration. In this, it is perhaps closer to the views of Juncker and Draghi than Schaueble and Weidmann.
Despite the confusing messages given by all sides at times, a Greek exit is not on the table.
What is really at stake, in the Greek negotiations, is the future of the Euro. Arguably, those who wish national sovereignty to trump political integration do not really want a single currency. As Draghi said in a speech in Helsinki in November 2014 (emphasis added):
Monetary union is more effective in securing the fundamental interests of citizens when common interests are recognised as such; and when the responsibilities that come with participating in a community are assumed in full. In other words, its ultimate success depends on the acknowledgement that sharing a single currency is political union, and following through with the consequences.
Despite its confrontational approach, the Greek administration understands this better than might be thought. It might interest readers to know that Yanis Varoufakis, the new Greek Finance Minister, has written a paper on how to save the euro dubbed a Modest Proposal.
In it he and his co-authors propose a European New Deal, which would provide the much-needed support for the region's economy. A central aspect of his vision of a new deal is investment for small and medium firms in struggling states financed through existing European bodies such as the EIB and the European Investment Fund (EIF).
So although the debate over the terms of Greece’s bailout will inevitably come down to squabbling over the detail, the real battle is occurring elsewhere. At its heart, it is a struggle between European federalists and sceptical politicians for the soul of the euro project.
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