Deeper unity far from easy solution to euro zone woes

ANALYSIS:ANOTHER DAY, another clarion call for unity as Europe fumbles around for a solution to the debt emergency.

European Commission president José Manuel Barroso states the obvious when he says Europe is facing the biggest challenge in its history. More unification is required to avert fragmentation, he argues, but that raises agonising questions for all protagonists.

In two years of endless woe, the euro zone countries have leaned closer and closer together in a bruising campaign to assert order over the single currency. For all the distance travelled, success seems as far away as ever. This is the starting point from which Barroso gave his second annual “State of the Union” speech to the European Parliament in Strasbourg. MEPs lapped it up. But his call for a deeper economic union is at odds with what many EU leaders believe feasible at this point.

Barroso, a former prime minister of Portugal, is out of favour with Germany and other euro zone powers. Against their will, he pushed them in August to radically increase the lending power of their bailout fund. He was no less forthright yesterday, insisting it still lies within Europe’s powers to resolve the crisis. Greece would remain within the euro, he declared, but member states must “truly integrate” if the currency is to be credible.

Here lies the problem, for the high road to integration is studded with landmines and deepening political strain is evident as Europe attempts to plot the next phase of the battle.

In Berlin today, for example, Chancellor Angela Merkel faces a crucial test when MPs vote on the first overhaul of Europe’s bailout fund. Her authority is on the line. Further reforms to the fund are already in play, but her power to bring them forward would be crushed if she needed opposition votes for a majority in the Bundestag this morning.

Such are the tensions as wealthy countries reluctantly take on increasing responsibility for the debts of others. It is no less so as their poorer brethren submit to the relentless grind of austerity. There will be a lot more of this, no matter how the battle to preserve the 17-country euro zone plays out in the end.

Barroso implies that further integration is more a matter of survival now than a federalist’s fancy, but there are severe constraints. Take the three big ideas in his speech: scrapping rule by unanimity to facilitate quicker decisions; a new tax on transactions in the financial sector; and the advent of “eurobonds” through which members would guarantee each other’s debt.

Each has undoubted appeal, but opponents would see noxious side-effects. What is more, none would do much to beat down the flames of the immediate crisis. Although critics routinely jump on Merkel for the studied tardiness in her response to the expanding crisis, the counter-argument from Germany runs it is much better to bring everyone in the Berlin establishment along first. No matter that it holds everyone else up.

Barroso sees merit in much swifter decision-making. “I am . . . thinking particularly of the constraint of unanimity. The pace of our joint endeavour cannot be dictated by the slowest,” he said.

“Today we have a union where it is the slowest member that dictates the speed of all the other member states. This is not credible also from the markets’ point of view . . . A member state does not have the right to block the moves of others, the others also have their national sovereignty and if they want to go further, they should go further.” All of that is very well. But if country in question is Germany – the biggest guarantor of euro zone bailouts and paymaster for the wider EU – then no progress can be made without it.

This is one of the cardinal lessons of the crisis. Germany always dictates the pace because Germany writes the biggest cheque and Germany is the euro’s bedrock. There is no avoiding it. At another level, however, it may well be that the unanimity rule is waived if the ongoing push to expand the powers of the rescue fund is voted down in Slovakia.

Quite what the Slovaks would say to that can only be guessed at. However, observers believe resistance to bailouts in what is one of the poorest euro zone countries could yet topple prime minister Iveta Radicova. The unanimous endorsement of reforms to the fund would be a long time coming in that event, prompting further turmoil in markets.

Barroso’s proposal for a financial transaction tax is no less contentious.

Europe’s financial sector has been supported to the tune of €4.6 trillion in the form of guarantees and capital infusions in the past three years, he said. The time has now come for banks and their ilk to make a payback to society. A tax on transactions could raise as much as €50 billion per year.

A levy of this kind, however, is already being resisted by Britain, which fears capital flight from the City of London. Although the notion finds strong support in Germany, France and Austria, top officials admit it is deeply divisive. The same goes for eurobonds, still seen by some as the panacea. It remains clear, however, that German doubters are in no mood to step back. The commission prefers the label “stability bond”, saying the initiative should reward countries who play a safe game while deterring those that don’t.

But to do this effectively would require a great leap forward in fiscal supervision from the centre, raising inevitable anxiety about the seepage of national prerogatives to Brussels.

Barroso argued that some of this can be achieved without reopening EU treaties but he conceded that treaty change would be required to make way for fully-fledged eurobonds. The unedifying Lisbon saga shows just how messy a prospect that is.

As the crisis escalates, Barroso’s message is that the time has come to bring out the heavy artillery.

Arthur Beesley is European Correspondent