It is still in one piece. As they relax this Christmas, the architects and guardians of the euro can at least make that claim. Indeed, despite its annus horribilis, the eurozone is about to expand: Estonia will join on January 1, becoming the 17th member. Such is the fruit of ever-closer union. Angela Merkel must be thrilled. What the euro needs is more Germanys. What it gets – an endless queue of them – is more Irelands: small, open, peripheral European economies, not obviously in need of cheap credit, dangerously vulnerable to euro-induced bubbles.
The eurozone sovereign debt crisis, a defining event of 2010, was the result of the unwinding of the mother of all such credit bubbles. The single currency’s political grandiosity demanded a strong institutional and fiscal foundation, which its designers forgot to provide. Nor did they anticipate an event such as the sovereign debt crisis: emergency rescues for Greece and Ireland at a cost of roughly €200bn; Portugal probably facing the same fate in 2011; Spain on the brink.
Political support for the euro remains formidable in Germany and France, but it needs to accommodate the new reality. It is no longer tenable to argue that monetary union is possible without some form of fiscal union, however narrowly defined. Monetary union can be (and was) imposed from above. But fiscal union – essentially the transfer of some of one country’s tax receipts to another – requires political legitimacy. The emergency measures pushed through so far lack that crucial ingredient. The European financial stability facility and other such organisms are merely a form of fiscal union by stealth.