The European Union may be about to see its first political retreat, but that does not mean that the EU itself is about to fail. Ever since 1957 when the Treaty of Rome was signed, the European community and later the Union has never gone backwards.
New members have joined, new areas of integration have happened, the single market has started, and the Schengen group opened their borders to each other, along with many other initiatives. There have been many cases of countries refusing to join a particular policy, and the EU runs at different levels of intensity in different countries, but to date no country has dropped out of something.
But now, for the first time, it looks likely that some countries will step backwards as it is very unlikely that a future euro can include Greece. The crippling uncertainty created by the European leaders quarrelling over the future of the euro has begun to give way to a more coherent view of the future. There is still plenty of room for the Europeans to get it wrong, but there is a growing consensus that a strong euro will eventually emerge from the crisis.
The strong euro will be based on the German model, and must involve a powerful European Central Bank operating in a new fiscal union of Eurozone members which must include some legal obligations on member states to subordinate their economic planning to an agreed transparent overall strategy.
The problem is that this strong euro will almost certainly not include Greece, and may have to exclude other small European countries with serious economic problems like Portugal and Ireland, while two other candidates for exclusion, Spain and Italy, will be deemed too large to fail and allowed to stay in the euro.
At the annual meeting of the World Economic Forum in Davos last week, German Chancellor Angela Merkel gave a particularly tough speech, in which she left no room for doubt that Germany will insist that future members of the Eurozone maintain much more stringent economic standards, and be required to be more transparent to central European authorities.
She spoke with great authority since her government will be paying for the new euro, even if the more spendthrift rest of Europe might resent her rectitude.
More surprisingly, British Prime Minister David Cameron also spoke in favour of a strong euro while making it very clear that Britain would not be part of it. He said that he agreed that the euro needed to be better managed, and he had nothing against Britain's European partners going ahead with their currency as long as it did not involve Britain.
The celebrated economic historian, Niall Fergussen, who has been famously sceptical about the euro since the early 1990s because of its inadequate political institutions, told a small meeting in Davos that he agreed with Merkel that if the euro is to work, then her suggestions for strong institutions are essential.
But Fergussen went further than Merkel's analysis, and pointed out that any currency requires its richer areas to transfer their surplus to the poorer areas, normally through some kind of central government spending.
His inflammatory prediction was that Germany would need to commit to giving 8 per cent of its gross domestic product to the periphery members of the Eurozone in the foreseeable future, and he pointed out that Merkel was understandably hesitant about telling the German public that they would need to make this huge commitment.
No one has really looked at how Greece will leave the euro. It will almost certainly not be dumped into the outer darkness and left to sink with a newly re-created drachma, which would involve a devaluation from the euro of around 40 per cent.
Instead, Greece (and any other country on the way out) will probably have to move into some kind of new currency loosely linked to the euro, like the previous European regimes of the ‘snake' or the Exchange Rate Mechanism, both of which regulated their member state's exchange rates. Such a secondary euro would also become an essential waiting room for applicant members on their way into the core Eurozone.
But there is little sense that Greece or any other country evicted from euro would want to leave the European Union. Nor would the loss of one country from the Eurozone imperil the whole EU. For all his arrogance, Cameron is right when he points out that there is lot more to the EU than the euro. The political union brings benefits to all its members, and the single market remains one of its most enduring features.
While the state of the euro is a major political problem, Europe's lack of econ-omic growth hampered by its poor competitiveness is a grim realisation that all members of the European Union are being forced to share.
It looks uncertain that European companies can continue to pay their workers high wages and the governments continue their high social benefits, while the goods they make offer no great advantage over those made in much more competitive countries in Asia and Latin America.
This is the underlying problem that the whole of Europe will have to tackle together, whether in the Eurozone or not.
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