PARIS, Oct 18, 2011 (AFP) - The debt crisis is pushing the eurozone beyond a simple monetary union, and whether it moves by baby steps or quantum leap, Europeans face a democratic test that risks a populist backlash.
For six decades Europeans have decided voluntarily to pool measured amounts of their sovereignty in the hopes of peace and prosperity, but this formula is being up-ended with markets now forcing integration under the threat of a collapse of the euro.
A crunch summit this weekend is likely to propel the bloc closer towards a fiscal union, which is likely to entail a new treaty and constitution revisions as control over budget and tax policy treads on nations' power of the purse, a key element of democratic legitimacy.
Having launched the euro without a means of ensuring fiscal control the eurozone states now find themselves on the "high seas and they've got no option to but to negotiate through the details" on economic governance, believes Professor Jonathan Story of the INSEAD business school outside Paris.
"Those details are treaty changing definitely," he added, saying the eurozone states face "uncharted waters and lots of rocks" as they seek to forge a political solution.
|AFP - Protestors camp outside St Paul's Cathedral on October 17, 2011, in London's financial district, during a third day of demonstrations against corporate greed and state spending cutbacks.|
The economic nature of the crisis and piecemeal response of eurozone leaders have so far largely obscured the political issues at stake, but Nicolas Veron of the Brussels-based think tank Bruegel says they are at its heart.
"Clearly the current phase of the crisis is primarily about the political nature of the European Union/eurozone," Veron told AFP.
"Do we belong together to the point of having explicit financial solidarity? Are we ready to have core tenets of economic and fiscal policy imposed from outside our member states?"
The question is a burning one not only for bailed-out Greece, Ireland and Portugal, but even Italy and Spain after the European Central Bank made clear demands before intervening in the bond markets to save the eurozone's third- and fourth-largest economies.
-- EUROPE "AT A WATERSHED" --
For European leaders the diagnosis of the eurozone's ills is clear: the lack of fiscal coordination -- or convergence in euro-speak -- to accompany monetary union.
Their initial remedy has been to improve the Stability and Growth Pact, their failed hybrid solution of collegial fiscal coordination, with recently adopted reforms giving it more teeth.
This response is in the tradition of EU states taking "baby steps" in sharing their sovereignty, according to Mitchell Orenstein, a political scientist at the School of Advanced International Studies in Washington.
Nevertheless, "this will be some type of watershed in terms of the creation of a European-wide fiscal policy."
But many see small steps as insufficient, with the European Central Bank saying the reinforcement of the Stability and Growth Pact does not represent the "quantum leap" needed in tightening fiscal control.
The ECB, France, Germany and others have called for an economic government or having an eurozone finance minister that can impose policy on states.
And Europe has come under intense pressure from its international partners to take radical steps to finally contain the crisis that now threatens to drag the world economy back into recession.
However Fitch ratings agency believes that "the public support and political will for a 'United States of Europe' simply does not exist", and moreover that an iron-clad fiscal union is not needed to avoid a break-up of the eurozone.
It recently predicted an institutional hybrid that falls short of full fiscal union, and said measures taken so far are building blocks for such a "third way".
But Veron believes that "the current crisis will not be resolved without an explicit and accepted form of fiscal federalism" and the change will be "similar in magnitude to the Maastricht Treaty" that established the euro.
However going to voters is not without risks given the 2005 rejection of a European constitution, and the immense difficulties to secure approval of its watered-down replacement -- the Lisbon Treaty.
Anti-bailout sentiment has already reared its head in Germany and Finland as well as in Slovakia where it nearly torpedoed the expansion of the eurozone's bailout fund.
-- EUROPE NEEDS "A NEW NARRATIVE" TO AVOID BACKLASH --
For Vivien Schmidt, the Jean Monnet Professor of European Integration at Boston University, this is symptomatic of a leadership deficit as well as fiscal deficits.
So far European leaders have mostly been communicating a negative narrative on saving the euro or facing disaster, not explaining to the public why Europe needs deeper integration, she noted.
"Without a new narrative, that's a positive narrative, the national leaders leave a big opening in particular to the extreme right, the populist forces that say we don't want to pay for other people," Schmidt warned.
Moreover, this comes as many Europeans are being asked to make considerable sacrifices as eurozone countries, either under pressure from eurozone peers or the markets, are rapidly bringing their budgets back into balance.
While welfare systems have been under pressure for decades, austerity measures are beginning to take aim at what many Europeans see as a social compact.
In some eurozone countries "you are seeing an effort ... to actually slash that welfare state," noted Schmidt.
Austerity also threatens cozy domestic politics.
Politicians let "all sorts of lobbies put their snouts into the public trough" to secure support, said INSEAD's Story, noting that state spending shot up from a quarter to half of the economy in the original EU countries in the decade after the first treaty, the Treaty of Rome, was signed in 1957.
If eurozone countries get serious about putting their fiscal houses in order "this would mean an end to what has become the pattern since the sixties in Europe," he warned.
Professor Antoin Murphy of Trinity College Dublin is more optimistic about the prospects of achieving a fiscal union, which he believes is similar in magnitude to the "massive" transfer of sovereignty in creating the euro.
"If you look at the history of Europe since the 1950s it's a history of great and greater success" despite regular crises as leaders have come together and found the will and vision to move forward.
Despite popular reluctance "they brought the public with them. And I think they can bring the public with them in this area."