That the European single currency was set up badly is now plain for all to see. A monetary union simply isn’t viable without credible plans to ensure some harmonisation of the individual economies that comprise it. Rather than exhibiting convergence, the differences between economies are growing more stark. The hope was that crisis would help forge the consensus needed to promote greater integration. Instead, it is driving national governments — and national citizens — apart.
As Luigi Zingales observes, political union is unattainable in the present circumstances. With a gun being held to the heads of European leaders, further integration would not be embraced with enthusiasm. Quite the opposite: public confidence in the concept of ‘Europe’ would be shattered.
The maximum that could feasibly be achieved in the present conditions is a regional banking union, capped with a Europe-wide financial sector supervisor. Politically, this would be difficult — not because of voter angst (many would surely welcome what might be seen as a tougher, more effective cop on the beat), but because an avenue for political patronage would be lost. However, with a single regulatory regime for banks, a regional mechanism for keeping them afloat would also be easier to achieve — critical at a time when so many of them are under enormous stress.
The details matter of course. For one thing, Zingales recognises the difficulties of getting the composition of the regulatory board right. If it’s seen to be dominated by the big member economies, many smaller countries might be less willing to sign up. And any financial-sector backstop would need to work out how far it would insure deposits in the case of a member state dropping out of the Eurozone: abandoning insurance under such circumstances would fail to prevent banking runs (the reason for establishing such a scheme in the first place); unlimited coverage could inadvertently subsidise those bailing out of the Eurozone.
In principle, these are not insurmountable challenges. Then again, European leaders have ducked easier questions. Europe is paying the price for poor institutional design. In the midst of a crisis, it cannot afford to repeat those mistakes.