Analysis on the three different scenarios that could result in Europe within a year, as the European Union tries to bring itself out of the economic crisis.

For such a small country, Greece has created a lot of trouble for Europe. The process of trying to prevent the country from defaulting on its debt has cost not only enormous sums of money, but has thrown the whole existence of the EU into question. These claims, while overly dramatic, have an element of truth to them.

Regardless of what happens, the EU as it we know it today will not survive the next year. The pressures to change are too strong. It will transform into one of three different entities. The first is a hard currency Europe. The second is a soft currency Europe. The third is that the euro zone will survive, but with a smaller number of participating countries clustered around Germany. This too will change the way Europe sees itself, governs itself, and deals with the outside world.

Three Possible Paths

The first of these paths, charted by Germany, France, and their close allies in Europe, is already in the making, and if successful will ensure that creditor countries get what they want. This is an economic constitution for Europe that prevents EU member states from borrowing too much for too long, and puts them under direct political administration from Brussels if they do not succeed on their own. This economic constitution would not be a political constitution, however. It would be a one-sided affair in which national sovereignty and democracy would only be extinguished or constrained for those countries running afoul of the rules. Creditor countries would have nothing to fear.

The second of these paths, preferred by the US Government, George Soros, and some key European policy entrepreneurs, has been developed in principle but has not been adopted by European institutions as their first-choice policy. It involves the issuing of euro zone bonds as leveraged finance to use in shoring up the finances of countries and banks that are proving short of capital. If successful, it will ensure that financial institutions, most of them in the core creditor countries, get what they want, which is a maximum return on their current investment in Greek debt. It would also ensure that debtor countries get the fiscal room they need to spread out repayments over a longer period, and that ordinary citizens have better economic and job prospects through quantitative easing. As many have noted, this second path requires a political agreement in order to work—over who will be responsible for repaying the bonds—that is absent.

The third of these paths, currently preferred by none of the EU's member state governments but an increasing number of citizens, became a much more viable option when the possibility was raised of a Greek referendum on the euro zone rescue package.  It involves leaving the euro voluntarily or being driven out for refusing to comply with the demands made by the creditor countries. The choice is between a package of tax increases and budget cuts which forces the debtor country to pay its way out of the current crisis, or a drop in the value of the national currency once it is re-introduced, which imposes the cost of adjustment on investors. If this were to happen and the precedent were set, Portugal would very likely follow Greece.

Note that none of these options incorporate either a political union or fiscal transfers between the member states. Neither of these appears to be a realistic option, despite the fact that they both are necessary to make a currency union run properly during a crisis. We can see that neither option is viable due to the unwillingness of creditor governments to speak about fiscal transfers, and the failure of the Constitutional Treaty in 2004. That Treaty was rejected by voters in several countries because it adopted the symbolism of a political union. For reasons outlined below, this is not about to change. Why are these the only options, and what are the consequences of each path?

Choosing Between the Paths

One way of viewing Europe's failure to consider a political union that supports the monetary union is the member state governments’ attachment to sovereignty. Despite the achievements of the EU, it is still built on the principle that the member states remain ultimately sovereign. The treaties are riddled with escape clauses, EU legislation is constructed to preserve member state autonomy at the implementation stage so that it builds on national laws, and the Heads of Government in the European Council still dominate key decision making. As we have seen in the Cannes Summit, patterns typical of international politics outside the EU repeat themselves within it—by the dominance of power (shared by France and Germany) over procedure.

Another way of viewing this reluctance to take Europe to the next level is the different societal attitudes towards what proper public policy should be, coupled with assessments that are made or labels that are slapped on other countries. What does it mean to be a state in the EU? Does it mean responsible finance or fiscal stimulus in the interest of public welfare? Does it encompass a sense of mutual responsibility and common identity that makes compromise more likely and common EU political institutions more possible, or does it divide national societies into “us/them” camps in which EU institutions, if developed at all, will focus on conflict and domination of those that are on the losing side?