The euro crisis can only be solved, at least according to Wolfgang Münchau in Monday's Financial Times, if the eurozone countries – the 17 member states of the European Union (EU) which use the euro as their currency – turn the eurozone into a fiscal union. If the eurozone does not transform itself into a fiscal union, he warns, it is bound to create a political monster.
Proponents of national sovereignty, however, insist that final approval of rescue operations should remain at the national parliamentary level because the authority to decide about a country's tax money should rest with its national legislature. "No taxation without representation," they argue, is a basic democratic principle.
Further, most voters in the financially sound northern European countries do not agree with Münchau. They regard the creation of a fiscal union as the ultimate political monster. They know that Münchau is one of the cheerleaders of a eurozone fiscal union and that, despite his suggesting otherwise, the eurozone is gradually turning into a fiscal union anyway.
Such a union will oblige the countries in the North to permanently subsidize the economically structurally inefficient countries in the South. If the North had known that this would be the outcome when the euro was created a decade ago, few would have agreed to give up their national currencies. Now, however, it seems to be too late.
One major step towards fiscal union will be taken with the enlargement of the powers of the EFSF (European Financial Stability Facility), the eurozone's bailout fund. The decision to enhance the fund's powers was taken last July at a summit meeting of eurozone leaders. It has to be approved unanimously by the parliaments of the 17 eurozone countries. There is only one minor obstacle still to be taken before the decision can be implemented. That obstacle is called Slovakia – and it will in all likelihood be taken this week.
Except for Slovakia's, the eurozone parliaments have all agreed to the EFSF decision. They all went along with the plan, although it involved a significant transfer of national sovereignty to the European level. The southern countries are giving up national sovereignty in exchange for a permanent flow of money from the rich North – which they do not consider to be a very bad deal. In northern European countries, such as Germany, Austria, the Netherlands and Finland, which have to finance the bulk of the EFSF funds, the decision is far more controversial – but the political class seems convinced that there are no other options, given that a collapse of the euro might drag the North down with the South.
The EFSF bailout fund was established last year to help eurozone countries on the brink of bankruptcy. So far, the fund's capital of €440 billion ($590 billion) can only be used to guarantee bonds which are issued to finance rescue loans in aid of countries, such as Greece, which are in imminent danger of financial collapse. EFSF bonds have a triple A-rating because they are guaranteed by the triple A-rated countries of the eurozone. Of these there are only six: Germany, the Netherlands, Austria, Finland, Luxemburg and France (though the latter's triple A-status is insecure).
Last July 21, the eurozone summit decided to grant the EFSF three extra powers: (1) to buy the debt of stressed eurozone countries, (2) to aid private Eurozone institutions, such as banks, that run into problems because countries are no longer able to pay their debts, (3) to offer credit to countries which are not yet in imminent danger but risk getting into financial difficulties.
The plan was so controversial, it took almost three months to get it approved in all the parliaments. Last week, however, the need to aid banks became critically urgent when Dexia, a Franco-Belgian bank, was the first to run into difficulties as a result of the sovereign debt crisis in Greece. The governments of France and Belgium had to come to Dexia's rescue by nationalizing it.
Obviously, Paris and Brussels would prefer for the EFSF to conduct such rescue operations in future. This would force wealthier eurozone countries such as Germany, the Netherlands, Austria and Finland to become involved. Understandably, they are not particularly keen on this. They have reluctantly gone along with the EFSF plan because the alternative might be a breakup of the eurozone. It is feared that such a scenario, with the richer northern countries centered around Germany, and the poorer southern countries centered around France each establishing their own currency zone, might have dramatic implications for the banking system of the whole of Europe.
Might, because no-one knows for sure. Some economists in the northern countries argue that in the long run the costs for the northern countries might be lower if they pay the price of such a eurozone breakup today, rather than agree to finance the survival of the eurozone for an indefinite period.
Slovakia, as a matter of principle, is not toeing the line. The country, which under Communist dictatorship was forced into the Soviet-bloc until 1989, insists on keeping its national sovereignty intact. Slovakia's Freedom and Solidarity party (SaS), one of the parties in the center-right government coalition, refuses to back the enhanced role for the bailout fund if Bratislava does not obtain the right to veto individual EFSF disbursements. As SaS does not support the Slovak government on the EFSF overhaul, the government needs the support of the Slovak Social-Democrat party (Smer), the largest opposition party. It was under Smer leadership that Slovakia joined the eurozone in 2009. Smer, however, refuses to support the EFSF bill unless the government steps down.
The European Social-Democrats, who favor restricting national sovereignty and back further moves towards pan-European federalism, are currently trying to convince Smer to support the Slovak government.
Apart from enhancing the EFSF's powers, many parliaments have also severely restricted their own powers. Thus far, every rescue operation by the bailout fund needs parliamentary approval in each of the 17 eurozone countries. Proponents of further centralization of powers at the European level argue that the parliamentary procedure is so time-consuming that the eurozone is always too late to respond in emergency situations.
Last month, the German Constitutional Court ruled that the final decision must remain with the Bundestag, the German parliament. By way of compromise, the German government decided, however, that from now on, a parliamentary committee will decide EFSF matters rather than the Bundestag in plenary session.
Many Germans see this as a serious infringement of parliamentary rights. Nevertheless, 523 of the 620 Bundestag members approved Chancellor Angela Merkel's EFSF bill. Merkel, who leads a center-right coalition of Christian-Democrats and Liberals, received the support of 315 of the 332 members of her own coalition but also of the leftist opposition, which favors further Europeanization.
Americans who wonder how such an overwhelming parliamentary support is possible for an EFSF bill which is hugely unpopular even with Merkel's own center-right electorate need to realize that many parliamentarians in Germany are directly dependent of the party leadership. There are two types of Bundestag members: those elected on a party list and appointed by the party in accordance with the party preference of voters; and those elected directly by their electoral districts in a similar fashion as the U.S. congressional elections. It is significant that the dissenters within Merkel's party are all extremely popular parliamentarians who have been elected directly by the districts. If the Bundestag had been directly elected according to the American electoral system Merkel might not have succeeded in bullying her own Christian-Democrat parliamentarians to restrict national sovereignty for the sake of saving the euro.