There has always been a debate about whether it is possible to have a single market without a single currency. Critics of the euro have always asked: why not?
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 neighbours' 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.
As for the single market, the EU's landmark achievement, there is no question that a eurozone breakup would severely disrupt its operation in the short run. Trucks would be halted at national borders. Banking and financial systems would be balkanized. Workers would be prevented from moving.
But what would happen then? There has always been a debate about whether it is possible to have a single market without a single currency. Critics of the euro have always asked: why not?
Under this scenario, the Single European Act, signed in 1986, would remain in place. Member states would be obliged to restore free movement of goods, capital, services, and people – the EU's "four freedoms" – as quickly as possible. Given the clear benefits that Europe has derived from the single market, they would have every incentive to do so.
Proponents of the single currency object that if Europe has separate national currencies, it will have separate banking systems, each with its own lender of last resort. So much, then, for a single market in financial services, or for harmonizing regulation and removing trade barriers behind the border. Free trade in goods and free movement of capital and labor would not survive the euro's collapse, these diehard Europhiles warn. We may yet find out if they are right.
And what about the acquis communautaire, the body of law that enshrines member states' obligations not just in terms of economic policies, but also in terms of democracy, the rule of law, and fundamental human rights? The intent of the acquis is not simply to make Europe more prosperous, but to make it more civilized. Spain, Portugal, and Greece had to establish functioning democracies before applying for EU membership. Even now, Hungary and Romania feel peer pressure and face sanctions from their EU partners when they engage in dubious electoral practices, compromise their courts' independence, or discriminate against minorities.
The co-operation needed to make that peer pressure effective might conceivably survive the euro's collapse. But finger-pointing about which country was responsible for Europe's damaging financial disruption would make it difficult for the members to maintain a common front. It seems likely that the acquis would lose much of its force.
A final way of thinking about the EU is as the "ever closer union" referred to in the Treaty of Rome and echoed in the Maastricht Treaty. "Ever closer union" means an EU that moves ineluctably from economic and monetary union to banking union, then to fiscal union, and finally to political union. This is what European leaders had in mind when they created the euro. They hoped that establishing a monetary union would generate irresistible pressure for the creation of an EU that functioned in all respects as a cohesive economic and political bloc.
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.
Europe can either move forward, toward deeper integration, or it can move backward, toward national sovereignty. Its leaders and, this time, its people need to decide. It is on their decision alone that the future of both the euro and the EU depends.
Copyright: Project Syndicate, 2012
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