So we have two crises now. A still-unresolved eurozone crisis and a crisis of the European Union. Of the two, the latter is potentially the more serious one. The eurozone may, or may not, break up. The EU almost certainly will. The decision by the eurozone countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce this split.
I wrote in October that a time will come when the interests of the eurozone will not only collide with those of the non-eurozone, but with the EU itself. We are now at that point. On Thursday night, Angela Merkel and Nicolas Sarkozy clashed with David Cameron in a familiar Britain-versus-the-rest diplomatic standoff. That itself is not new. But a determination to go outside the treaty to overcome the disagreements adds a new dimension to this long-lasting dispute.
The fiscal union likely to be agreed in March may not initially be very effective in resolving the crisis. It focuses on all the wrong issues, mostly fiscal discipline, which is not the real reason why the crisis has spread to Spain or Belgium, for example.
But the eurozone nevertheless made an important political statement. It will not allow outsiders to stand in the way when it needs to act. For the monetary union to survive, its one-sided, ill-conceived fiscal union will have to become more effective. Over time it will have to usurp central EU roles, especially in the internal market. I would expect it to create its own internal market inside the existing one. It will have to develop a highly integrated financial market with a single financial supervisor. In particular, I do not believe that the eurozone will allow a situation to persist where its main financial centre is located offshore. It will also want to set labour market rules and co-ordinate tax policies. In all of those areas, the eurozone and the EU will get into a permanent legal and political conflict, in which the EU acts as a brake on the eurozone’s development.
One way or the other, this conflict is bound to lead to an eventual split of the EU. I have no idea when or how this will happen. The technicalities are not all that important. Of course, no member can be ejected from the EU. But there is nothing that can stop others from taking action that protects their interest. The new Lisbon treaty makes it possible for countries to leave the EU voluntarily, which means that legally it is possible for the eurozone plus the aspiring members to set up their own rival organisation – in theory. In pratice, that is not likely to happen, but the mere existence of a divorce procedure is probably sufficient to bring about this eventual outcome.
Thursday’s European Council meeting has demonstrated that a monetary union cannot co-exist with a group of permanent non-members in unified legal framework. The EU with its current treaties and institutions has proved to be an insufficiently flexible framework to run a monetary union and a disastrous framework for a monetary union in crisis.
These latest developments have reaffirmed my conviction that the only way to save the eurozone is to destroy the EU. But European governments may, of course, end up destroying both. All they did in the early hours of Friday morning was to create a new crisis without resolving the existing one.
The writer is an associate editor of the Financial Times and president of Eurointelligence