The eurozone is edging closer to doomed fiscal union. But sceptics shouldn't celebrate, as the chaos will reach Britain too
At last, a real crisis. The Franco-German salvage operation for the eurozone was inevitable for the simple reason that Armageddon never happens. Nicolas Sarkozy and Angela Merkel patched together yet another "temporary" bail-out for the Greeks, and will do so for the Portuguese and Irish if need be. German taxpayers will pay the Greeks' bills and aid Europe's banks as they continue to profit from 20% interest on their sovereign loans. Power always wins, so long as it can get someone else to pay.
A more intriguing crisis erupts in Britain. The chancellor, George Osborne, showed impressive cynicism in abandoning his opposition to a "two-speed" Europe and demanding that the eurozone move swiftly to fiscal union ? with Britain firmly outside. Only such a union, he said, would discipline the debtor nations and thus avoid bank anarchy that would spill over into the British economy. Britain would have no part in any rescue, but it relied on the eurozone to continue on its path to ever closer union.
Cynical Osborne may be, but he is right in his historical analysis. The latest Greek bailout is the moment when continental Europe finds itself forced to transmogrify from a loose federation into a brittle unitary state. If European politics starts to implode and return to xenophobia, manned borders, ethnic cleansings and trade boycotts, that start is now. This is a true turning point.
From the earliest days of European union after the second world war, such a point was the greatest danger. As long as national currencies could move flexibly in a climate of free trade, Europe's extraordinarily diverse political economy could enjoy a "variable geometry". The safety valve of devaluation allowed countries to adjust over time. Their distinctive autonomies and political cultures could survive.
That safety valve is now turning off. Huge subsidies must flow from high-performing to low-performing countries within the eurozone to pay government bills, support projects and finance sovereign debts. In their wake come bureaucratic intervention and fiscal discipline. This means harmonised taxes, harmonised enforcement, harmonised regulation and harmonised government, only distantly accountable to electorates. Once monetary union was introduced, back in 1999, the rest had to follow.
Gordon Brown's greatest gift to the British nation was to face down Tony Blair in 2001-02 and stop him joining the euro. Blair regarded anything anti-European as "hopelessly, absurdly out of date and unrealistic ? a kind of post-empire delusion". The euro was to be the culmination of his plan for European supremacy. Brown stopped it. The epitaph on this particular spat is Blair's brief and dismissive reference to the euro in his memoir, as if he was never really in favour. It is a bizarre rewriting of history.
Only a fool could want Europe to return to the divisive feuds and nationalist horrors of the 19th and early-20th centuries. Any student of the Balkans knows that such horrors are never far below the surface. But a monetary union that denies nations the freedom to breathe and adjust their economies in their own way over time runs just this risk of regressive reaction.
Each step towards "ever-closer union" has brought reaction nearer. The Single European Act of 1986 was necessary to police free trade, but the Maastricht and Lisbon treaties put in place the architecture of a federal state that has become ever more rigid and ever more unpopular. The single currency bound the politics of Europe with hoops of steel. Osborne wants those hoops to tighten further, to trap the 17 eurozone countries in a realm of unaccountable federalism, a fiscal rigidity that he must know will eventually snap.
The test will be to destruction. Something must be done to get the Greeks to pay their taxes or the Germans will refuse to pay their subsidies. As Osborne says, eurobonds are needed that would require Germany to stand behind southern states' debts, but this will mean southern states accepting a "German-designed economic policy". Brussels must fix taxation and public spending targets on weaker euro states or bank defaults will wreck Europe's shaky economic equilibrium. Yet already attempts in Brussels to impose uniform corporation tax are tottering. How can a true fiscal union hold?
We have already seen the demands of the Franco-German axis and the IMF furiously resented by ailing countries. The Greeks are rebelling in their humiliation, and the Germans are rebelling in their generosity. Across Europe the old pro-EU consensus is evaporating. The Slovakians have declined to join the euro bailout, accused by the EU commission of a "breach of solidarity", words reminiscent of the old Soviet Union.
The latest Euro-barometer of public opinion shows for the first time that overall distrust of the EU outstrips trust, predominantly so in Britain, Germany and France. Polls show ever fewer countries regarding membership as a good thing, with opposition strongest the farther north we go. It is ominous that the politics of euroscepticism is fusing along old historical lines. When the EU was a sound trading union it was backed in Protestant northern Europe. As it slid into institutional orthodoxy and heavy cross-border transfers, its appeal shifted to the Counter-Reformation south. The high-flown language of Val�ry Giscard d'Estaing's first draft of the Lisbon treaty was that of a papal encyclical.
As before the Reformation, the taxing of northern Europe to sustain the subsidies and debts of mother church lasted awhile, but it could not last for ever. German taxpayers may bail out the Greeks, because half the Greeks' debts are to foreign banks. But these taxpayers will not also bail out the Portuguese, the Spaniards and the Italians. The attempted revival of the Holy Roman Empire is doomed. Luther's theses will soon be nailed to the doors not of Wittenberg but of the Berlaymont palace in Brussels.
"Ever closer union" was always a dangerous fantasy, a top-down imperialism forged in the over-fed minds of the cardinals of a pan-European faith. It thought it could deny political reality. Its hubris lay in a belief that somehow monetary union could leave national identity untouched, that a corrupt European parliament could offer democratic accountability enough. Now the good times are over, that accountability cannot validate the awful disciplines that must be imposed on debtor nations.
Vigorous domestic democracy is the one strength of Europe's postwar states. Distant discipline will not wash. Ever closer union falls squarely into the historian Barbara Tuchman's definition of a grand historical folly, "a policy demonstrably unworkable" and widely known as such at the time. It was a policy pursued by Europe's leaders, like so many follies before, as "a love-child of power".
The attempt to impose fiscal union on all Europe will bring its demise. But where Osborne and his brand of scepticism are wrong is in so obviously willing this demise. When monetary union reaches breaking point and unravels in an orgy of xenophobia, Britain will not be immune from the chaos. The pocket Napoleons who embarked on this venture may meet their Waterloo. But Britain's economy is unlikely to escape the carnage.
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