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In Europe, June is a make-it or break-it month

Thomas Kleine-BrockhoffThe Christian Science Monitor

One day, when historians look back to June 2012, they will likely find it was a make-or-break month for Europe. The debt crisis, now in its third year, has produced a moment of extraordinary clarity for the 17 countries joined by the euro: Either move toward real fiscal union or break apart.

After two years of incremental reforms brought on by the crisis, big questions have muscled their way onto the European agenda. Popular revolts against austerity and the conditions attached to bailouts in Greece, as well as a crisis of trust in Spain and its banks, create a dilemma for Europe’s leaders: They are forced to centralize more power in Brussels at a time when ever more citizens resist that idea.

In order to survive, the eurozone must do both. It must centralize more (move closer to a federal model of governance) and respond to its citizens’ concerns.

For the first time, the pressure to fix the construction error of monetary union – erected without any binding, central fiscal authority – might be great enough to force Europe’s nations to cede substantially more sovereignty.

The battle lines for a June 28-29 summit of European heads of state are drawn. On one side are southern debtor countries that want German money soon in order to calm the financial markets. But these countries wish to give up as little sovereignty as possible later – the price demanded by the Germans.

On the other side are the Germans, who first want reforms and a commitment to centralization of power in Brussels. In the middle are the French, who want more fiscal integration without ceding French sovereignty.

To Americans, it has always been a mystery why the rich Europeans (especially the well-off Germans) don’t simply quell the crisis with overwhelming force – the force of money and the power of a more federal Europe.

Many financial analysts believe the German preference for a delay in responding to the debt crisis has been too costly. Yet the Germans, who account for less than 30 percent of the eurozone’s output, have always felt too weak to carry the whole load of rescue and reform. They enlisted a powerful ally: the markets.

Without the pressure of the markets, Chancellor Angela Merkel’s team believes, there will be no structural reforms in southern Europe. And there will be no market pressure without limits on German largess. Too much help creates a moral hazard: Why reform when the Germans pay anyway? This concern created the German strategy of brinkmanship. It has been a perilous approach, but it has also forced reforms across the continent.

Now, a turning point has been reached. More brinkmanship and more delay risk tearing the currency union apart. And so the Germans are backing fiscal federalism – at least in principle. They now agree to the idea of centralizing bank oversight.

In the end, however, fiscal federalism requires Germany and her northern allies to share part of their wealth with their southern brethren. That is what they still resist. They fear that jointly financed bank bailouts as well as joint deposit insurance for banks will create joint and several liability across the continent – the first step on the way to the “eurobond” that they so detest.

The Germans continue to oppose putting their own money on the line for the mistakes of others. Eventually, the Germans will have to give in if they do not want to be responsible for bringing down the whole edifice.

As the outgoing World Bank President Robert Zoellick puts it, “Germany will not achieve its strategic aims of a more integrated and fiscally sound Eurozone unless it supports [the] reforming states.”

The sudden drive for core features of federalism will not be popular across the continent. According to a recent Pew Global Attitudes poll, Germany is the only country (among eight European nations) where a solid majority still believes economic integration is desirable. Everywhere else Euro-skepticism and nationalism are on the rise.

But in a union of democracies, it is “impossible to force sovereign countries to adhere to rules if their citizens no longer accept them,” as Daniel Gross from the Centre for European Policy Studies in Brussels writes.

So how can Europe’s leaders avoid the most tragic of choices: Save the euro and lose the people? Or lose the euro and cause economic mayhem? The best answer appears to be a marriage of minimal federalism with maximal democratic control. Certainly, support for European integration is slipping because of crisis management that is seen to be inept. Conversely, success will likely drive up support.

In the long run, the 27-member European Union and the smaller eurozone will need to gain more democratic legitimacy. Reforms should not just transfer power to the unelected few in Brussels. The European Parliament needs to be further empowered and tasked with fiscal oversight. The introduction of elected office on the European level might be pondered.

But, most important, any attempt at federalizing the eurozone, even in a minimal way, needs to be accompanied by the removal of unnecessarily centralized regulation.

One of the odd characteristics of “Europe” is that it doesn’t do what it should be doing, and does what it shouldn’t be doing. Brussels has become a factory of norm setting and harmonization across the continent and beyond. The authority to regulate even the smallest details of life should be returned to the national level.

In exchange, Brussels should seek authority to gain more control over the eurozone’s fiscal affairs. The combination of devolution and centralization could, at a minimum, neutralize critics. At best, it would form the cornerstone of a modernized and newly credible eurozone that has finally overcome its crisis.

Thomas Kleine-Brockhoff is a senior transatlantic fellow at the German Marshall Fund of the US. He leads its EuroFuture Project.