Split the EU? Europe debt crisis pushes idea into the open.

Splitting the EU – creating a small core of eurozone countries and a looser outer circle – has been taboo. But as Europe debt crisis worsens, France and Germany are discussing the idea more intensively.

A long-running taboo on the idea of splitting the European Union into two zones or tiers is being breached by a debt crisis that has brought Ireland, Portugal, Greece, and now Italy to their financial and political knees.

An EU comprised of "core" dynamic nations and less-competitive "peripheral" nations has been viewed for years as abridging the idealistic project of a postwar Europe of greater integration and unity. Critics say the idea is harmful at a time when EU confidence is low, and will reopen national divides and have bitter unintended consequences. But advocates say the 27-nation EU doesn't coordinate well – and that the EU is already, in fact, operating at two speeds.

French president Nicolas Sarkozy was the first EU leader to openly break the stricture on discussing a new division, talking this week about a Europe of “core” nations and less dynamic states in a speech at Strasbourg University in France. "In the end, clearly, there will be two European gears," he said: "one gear toward more integration in the eurozone and a gear that is more confederal in the European Union."

The current European debt crisis dramatizes the issues. The debt crisis that emerged in Greece in 2010 reached another stage Thursday as Greece chose – after four days of political wrangling – a new caretaker prime minister, Lucas Papademos.

A former deputy chief of the European Central Bank and Harvard professor, Mr. Papademos appears to have won the day in Athens simply because he is not in the grip of local politics. He has only 100 days to act before new elections, and faces an immediate test to approve a 130-billion-euro EU bailout package and pass muster for an 8-billion-euro loan installment to avoid bankruptcy in December. 

At the same time, in Italy, the eurozone's third-largest economy, a front-runner emerged, Mario Monti, to take over from Prime Minister Silvio Berlusconi, who agreed to leave this week amid an epic rise in the nation's borrowing rate and a 1.9 trillion euro (about $2.6 trillion) debt.

Mr. Monti is a former EU commissioner and would lead a so-called “technocratic government” designed to calm markets.

Merkel adopting a two-Europe policy?

A two-tier Europe has been discussed in hushed tones for more than a year in EU financial and political circles. But Reuters on Thursday quoted an unnamed senior EU official in Brussels saying that "France and Germany have had intense consultations on this issue over the last months, at all levels.”

European Commission President José Manuel Barroso warned this week against entertaining the idea, saying in a Berlin speech that "there cannot be peace and prosperity in the north or in the west of Europe if there is no peace and prosperity in the south or in the east.”

In recent weeks, German chancellor Angela Merkel has appeared to adopt a two-track policy. She strongly supported the concept of a single Europe in rousing statements on Oct. 26 at the Bundestag, and has said that the end of the euro would mean the end of Europe. But she was also ready to see the back of Greece in the eurozone at the G-20 summit Nov. 4.

Critics argue that Mrs. Merkel has been putting the squeeze on Greece and other struggling eurozone states with severe austerity demands that could force them out.

Indeed, in Greece, the crisis is amplified by a popular feeling that future Greek generations will be yoked indefinitely to austerity. Meanwhile, the Germans, often called the paymasters of Europe, are saying they do not want to be yoked indefinitely to a future of expensive bailouts of less competitive nations.

“Traditionally in Europe you would have a debate on austerity,” says a policy analyst and former Spanish diplomat. “But in Spain we are not having a stimulus and austerity debate, and it means we are signing onto a policy that many don’t believe in, and that brings resentment and a psychological break up … if you are part of a project in which you don’t have a voice.

"Right now, either the markets or Germany dictates solutions … so there is no common political project,” the former official continues.

Financial and social chaos?

In Strasbourg, Sarkozy pointed out that the Balkan nations are now EU suitors, and it is unrealistic to expect that new members of an already 27-member union, should it grow to 33 members, can perform as well as the core of Europe, which has often been considered its northern and wealthier tier.

Former German foreign minister Joschka Fischer also this week advocated a two-speed EU, saying that coordinating 27 nations isn't working.

Yet a split is described by many analysts as more fateful than those looking at the union through a nationalist or purely economic lens consider it to be. Reuters quoted an EU diplomat saying, "This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past 60 years…. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it."

The Economist weighed in this week on the implications of nations leaving the euro and moving to old currencies like the Greek drachma or the Italian lire:

“What is vastly underestimated by advocates of euro exit is the financial and social chaos that would ensue both in the departed country and in the rest of the world…. It would be a gigantic financial shockwave. Once departure by Italy were a serious prospect, there would be runs on its banks as depositors scrambled to move savings to Germany, Luxembourg or Britain, in order to avoid a forced conversion into the new weaker currency. The anticipated write-down of private and public debts, much of which is held outside Italy, would threaten bankruptcy of Europe's integrated banking system.”

Not necessarily so, notes Jean-Paul Piris, a former legal counsel of the European Council, and an architect of the 27-nation structure. Europe after the fall of the Berlin Wall was understandably interested in accepting former Soviet satellites. But its focus on "broadening" came too quickly, and at the expense of "deepening." If the EU cannot in fact act decisively, he argues in the Financial Times Nov. 4, "Far better would be to consider a two-speed EU, which would include an avant-garde group, probably based on the current 17 members of the euro area."

Opponents said a shift to a core group may not solve fallout from the acute crisis of Italy and Greece, who belong to the 17 EU nations that use the euro.

No central banks

Europe’s crisis illuminates sharp divisions in the politics of different eurozone nations that are united by a currency but not a common fiscal policy, analysts say. Neither do eurozone nations have separate national banks, or “lenders of last resort,” like the Federal Reserve in Washington, the Bank of Japan in Tokyo, or the Bank of England in London.

Political economist Jean-Paul Fitoussi commented in an interview with the Monitor last week: “Why does Italy or any country have a problem? It has no central bank. If it did, nothing would have happened in the markets.”

“All eurozone countries are vulnerable to market speculation because they have no central bank," says Mr. Fitoussi of the Institute of Political Studies in Paris.  “If the ECB [European Central Bank] steps in and announces solemnly that it is the lender of last resort, the problem would be solved.”