It's the story everyone's talking about - where is Europe going? Surely a scaling back of continental federalism is better than the loss of the Euro. There are only two real routes - one is a full meltdown of the euro, and all that goes with it; the other is complete homogenisation of European wealth and the related surrender of national sovereignty. Europe's leaders have run away from this choice. They want to keep the euro intact-perhaps dropping Greece. But northern Europeans, led by Germany, will not pay out endlessly, and club med state debtors increasingly resent foreigners telling them how to run their countries. Do Europeans really share a sense of common direction? If they do the currency may be saved. But this requires Germany to be tested, fully tested but all the while Chancellor Merkel maintains a position of stick and not carrot. Her forcing on reform in the southern nations may just stick in Mediterranean throats too much. And if she backs off she risks her national support. This German brinkmanship is eroding the view that the currency has a real future, which raises the cost of rescues and hastens the very meltdown Germany opines it wants to avoid. Ultimately, Europe's future will be formed in Berlin. Whilst some quarters argue that Europe would be saved with an unlimited bank bailout, the reality is that with or without Greece, a solution requires so much more. Whether Germany likes it or not, then a federal-style economy requires federal-style borrowing - yes, the Eurobond. For monetary union, a greater level of fiscal union is required. That doesn't mean a full blown federal state but the zone needs a plan based on centralised debt. That won't sit well with many Europeans. But then, is it worth doing? The Euro was poorly conceived, poorly executed and run the same way. Most say Greece should have not been let in, but I go further and say that Portugal and even Italy should have been forced to do more at entry. As for the rest of the expansion, backed by the French and Germans who rely on pillars of peace and stability to ride roughshod through all of the rules, it was and is entirely misconceived without proper controls. To break up now may well allow individual nations to restore control over their monetary policy. That's all very well but those who believe that countries would be better off are staying away from the subject of the cost. Even if done well, corporates and financial institutions would be crippled and failed di to the burden of unmatched domestic and foreign balance sheets. Legal cases would follow. It would go on for years, decades even. Running the same scenario with some pessimism (yes the paragraph above is optimistic!) and a break up would collapse stock markets, drive runs on banks and cripple global production and world trade. At best the EU itself would fall apart and in the mayhem right wing nationalistic interests would gain popular support. A bail-out is better. Right now though, the problems run deep. The current support of the banks by the ECB is not helping the underlying economies of Spain, Portugal, Italy and Ireland. While bond yields sit around or above the 7% mark and growth is so low, uncertainty follows and the problems worsen. These nation states can't cope alone and Europe must raise and service debt as a federal block. Undoubtedly this will create anti- EU sentiment in the UK, and frowns from the US. This forward criticism needs to be ignored though. Europe doesn't need a full blown federal system, however it appears, just fixes to the original model. The ECB needs to embolden itself and take over bank supervision, capital controls, compensation schemes and regulation from Eurozone countries. No compromise - full blown taken. After that zone states will have a much reduced management of their fiscal budget and only then with smaller mutualised debt raising. And so, the leaders need to decide, and moreover, Germany has to decide if it will fund it for the sake of Europe.
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