"Europe's leaders were right about the pressure. Monetary union without banking union will not work, and a workable banking union requires at least some elements of fiscal and political union. But they were wrong about the irresistible part. There is no inevitability about what comes next."
BERKELEY – Europe's crisis has entered a quiet phase, which is no accident. The current period of relative calm coincides with the approach of Germany's federal election in 2013, in which the incumbent chancellor, Angela Merkel, will be running as the woman who saved the euro.
But the crisis will be back, if not before Germany's upcoming election, then after. Southern Europe has not done enough to enhance its competitiveness, while northern Europe has not done enough to boost demand. Debt burdens remain crushing, and Europe's economy remains unable to grow. Across the continent, political divisions are deepening. For all of these reasons, the specter of a eurozone collapse has not been dispatched.
The consequences of a collapse would not be pretty. Whichever country precipitated it – Germany by threatening to abandon the euro, or Greece or Spain by actually doing so – would trigger economic chaos and incur its neighbors' wrath. To protect themselves from the financial fallout, governments would invoke obscure clauses in EU treaties in order to slap temporary controls on capital flows and ring-fence their banking systems. They would close their borders to stem capital flight. It would be each country for itself.
Would the European Union survive? The answer depends on what one means by the EU. If one means its political organs – the European Commission, the European Parliament, and the European Court of Justice, then the answer is yes. These institutions are now a half-century old; they are not going away.