THIS IS a very big week for the European Union, as its political leaders prepare for a summit on Friday that will determine whether the euro survives.
The single currency’s design is universally recognised as incomplete when confronted with an economic crisis on the scale of the last three years. Political bargaining to put that right brings together three major elements: tighter fiscal rules, a backstop role for the European Central Bank and treaty change to make these new functions legal. Sufficient progress has been made to think that decisive moves can be made this week if the political will to do that exists.
Difficult decisions face each of the leaders and states involved as they seek to protect their respective interests and values. But they are all aware that if they do not agree a sustainable package to save the euro, the alternative will be far worse. Warnings last week that this is the deepest economic crisis facing the world since the 1930s are convincing and so are grave reminders of the extreme political fallout for Europe in that decade. It was precisely to avoid this happening again that the whole edifice of European co-operation and integration was raised after the war. Such an historical awareness is essential to understanding what is now at stake.
Consistently the EU’s political leaders have been criticised for doing too little too late in their search for effective ways to sustain the euro. Financial markets made dominant by deregulated and open globalisation remain to be convinced the currency can be saved. The markets crave political leadership yet often fail to see how much progress towards a solution has been made. Part of any successful outcome for the euro system must be a new compact between transnational regulation, state sovereignty and market freedoms.
That is the logic behind Germany’s cautious but steadily advancing approach towards linking tighter fiscal rules to an expanded role for the European Central Bank. It makes sense to tie down those rules before allowing the bank buy EU governments’ bonds or going further to create a mutually recognised eurobond system. The Germans must now choose whether enough ground has been covered to make that political link. It will be costly for them but they also understand better that failure would be more costly by far. Treaty change to lock this in legally would make it easier for them to make the decision this week.
Such transforming events inevitably bring national interests and power politics into the foreground. But these brutal characteristics must not be allowed dictate the shape of a more deeply integrated EU. Smaller states like Ireland are protected by the EU’s institutional architecture against an intergovernmental exercise of power by the largest ones. Any treaty change must preserve that political balance. Building alliances with other smaller member states to insist on this should be among the Government’s highest priorities. If this is not done the emerging system will lack the trust and legitimacy required to sustain the political grand bargain that now looks possible this week in Brussels.