Europe’s federal moment will take time

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The last four months created an illusion that the worst is over in the eurozone crisis and more attention can be devoted to the project's future, writes Pawe? ?wieboda. However, much remains to be done and the golden rule of the new European Union will be to "Trust and verify", he says.

Pawe? ?wieboda is president of demosEUROPA – Centre for European Strategy. This op-ed was first published here.

"The last four months created an illusion that the worst is over in the eurozone crisis and more attention can be devoted to the project's future. The US model has inspired much of the thinking of Herman Van Rompuy’s advisors.

Officials in Berlin, however, have tended to believe that Europe, faithful to Frank Sinatra’s advice, should do it its own way and copying the US experience could be detrimental, rather than useful. As a result, there are vast differences between the way the banking union is organised in the US and how it is planned in Europe.

In the latter case, it starts from federalising supervision while the US has federal deposit guarantee and bank resolution functions while supervision remains complex and multi-faceted.

There are also three more profound difficulties. One has to do with the differing visions of the basic premise on which the eurozone should be based. Member states have different sets of ideas in mind when they think of the banking union.

Germany wants an insurance mechanism against distortions and bubbles in the banking sector of the future. Spain wants a transfer union with bank recapitalisation from a common fund, balancing out the higher cost of borrowing which Spanish enterprises need to put up with.

Another problem is the policy mix. In order to solve its problem of internal imbalances, Europe is testing a melange of internal devaluation leading to recession in the South, inflation in the North, some fiscal transfer and a prospect of debt mutualisation.

The medicine is working when it comes to the lowering of labour costs in the troubled countries but given the scale of the exercise, it leads to massive angst among the public. It also overlooks the fact that competitiveness is a complex phenomenon which should not be reduced to constraining labour costs.

The World Economic Forum takes twelve pillars into account when measuring competitiveness, from infrastructure to goods markets efficiency. The EU leaders should not fall into the trap of chasing one objective at the expense of many others.

In the background of the discussion, there is the changing meaning of solidarity, one of the sacred foundations of the European project. In the past, it has done wonders to help some countries stand on their feet. But it has also been widely abused, incentivising unproductive activity and creating moral hazard.

The appetite for traditional forms of solidarity understood as financial transfers, has never been lower. Not only among states but also within them. Bavaria protests loudly against subsidising the less prosperous states in Germany. Catalan leaders want independence from Spain, partly out of angst against what they see as an asymmetrical financial deal.

New type of solidarity is being born as the old one is buried. It will have to be about a more precise contract in which states do specific reforms in exchange for financial aid. "Trust and verify" will be the golden rule of the new European Union.

The fourth challenge is the relationship with the markets. They have given Europe’s leaders the benefit of the doubt since Mario Draghi, the ECB President, announced in August, he would put the bank’s entire fire power behind the sovereigns.

"You don’t bet against the ECB", if it is ready to act as the Fed, has been the way the markets have read the situation. As things on the ground worsen, they might want to test the ECB’s resolve and see how the conditionality behind the OMT programme is to be exacted. This might not necessarily be bad for Europe if it can survive the immediate onslaught.

It remains the case that the European leaders move only when the markets demand it. The markets' contribution to the making of a European federation will be greater than anybody else’s.

The squaring of the circle will lead to much "sweat and tears". Someone will have to force through his or her (her or his rather) vision of the eurozone's future and back it up not only with political resolve but also financial backstop.

If the German vision is imposed, others will feel oppressed. If the Southern Europeans and France carry the day, Germany can become increasingly frustrated and might breed an inward looking and anti-integrationist sentiment itself.

It has become a commonplace in Europe to say that the final accords in the grand redesign of the eurozone will only be taken after the German elections next September. Then there are the European Parliament elections and the new institutional cycle beginning in 2014 which will provide a genuine verdict of what the public thinks about the anti-crisis strategy.

Yet, we will need to hold our breath for longer than that. There is no reason to expect that after the elections Germany will suddenly accept what others want, mainly the pulling of public debt or joint issuance of new debt in the form of eurobonds. The final act will be more messy and painful.

There may be casualties in the process, if some countries don't turn the corner early enough. "The car can't be fixed without handing over the keys", some say. A European federation is coming but it will take years to have it in place."

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