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Talk of federalism is back, as European leaders search for answer to loss of nerve over financial crises In a damp Brussels garden one evening last week, the dreamers who have long fantasised about a United States of Europe sipped champagne and discerned a silver lining in the EU’s worst ever crisis. “Federalism is back,” observed Guy Verhofstadt, the liberals’ leader in the European parliament. “We can talk about federalism again.” Prime minister of Belgium for nine years, Verhofstadt was unable to construct an enduring Belgian federation. By Friday the country will have gone 460 days without a proper government and may yet fall apart. Undaunted, Verhofstadt has turned to bigger ambitions. “A European fiscal union, an economic union, a political union, this is what the markets want.” Seldom has the political climate seemed so unsuited to such vaulting vision. Almost two years of sovereign debt crisis in Greece and elsewhere have plunged the EU into helpless defeatism, its leaders exhausted and feuding, struggling to assert themselves as masters of Europe’s destiny . The mood is one of mistrust, foul tempers, division between north and south, big and small, while Brussels-bashing has long since ceased to be a specifically British sport. But Verhofstadt and the champagne crowd at the Union of European Federalists bash are not as lonely as they were before the crisis befell the EU. In the past couple of weeks, four German cabinet members, all in Angela Merkel’s Christian Democratic Union, have called for a federal Europe as the answer to the EU’s loss of nerve. The European commission chief, José Manuel Barroso, never tires of urging “political union” on the EU, most recently in a despairing speech to the European parliament in Strasbourg on Wednesday. Six former heads of European governments, gathered in a German billionaire’s brains trust and including Tony Blair, have just delivered a plea for a federalised EU. Gerhard Schröder, Merkel’s predecessor as German chancellor, proposed a European government answering to a beefed-up European parliament. Jean-Claude Trichet of France, the outgoing head of the European Central Bank, is calling for a European finance minister. His successor, Mario Draghi of Italy, sees the EU’s salvation in a “quantum leap in economic and political integration”. Just a few years ago, such notions of “ever closer union” appeared dead and buried after the gruelling nine-year failure to agree a European constitution palatable to European voters. An expanding union of 27 countries had rubbed up against the limits of integration. Politicians such as Verhofstadt were seen as fringe fanatics. Not any longer. “The best opportunity in a generation for a united Europe,” maintains the Belgian. “Now these people are coming out of the woodwork again. They’re making the running,” says a senior national diplomat in Brussels. “If they get their way, you would have a single government in Europe setting fiscal policy, macro-economic policy for all of the eurozone. Individual countries would be reduced to the status of regions. It’s such a huge step. I’m very sceptical.” Major questions attend this emerging campaign to build a united political Europe – issues of mandate, democratic legitimacy, loss of sovereignty. Above all, what, as the central player, does Germany want. Despite the clear aversion in Berlin to bailing out the eurozone’s collapsing economies, there is little sign that the Germans have turned anti-European. They want Europe, but the question is what kind of Europe. “Despite her rhetoric, Merkel will be ready to proceed towards a solution, stronger European macro-economic government, with strict parameters set,” says Pawel Swieboda, head of demosEUROPA, a Polish thinktank. This embryo European government is already taking shape. In the summer Merkel and Nicolas Sarkozy, the French president, agreed to summits at least twice a year of the 17 countries using the euro, with Herman Van Rompuy, the president of the European Council, put in charge. In all likelihood, there will be a new “secretariat” created to support him. From 2013 there will be a permanent eurozone bailout fund. There is much talk of a European debt agency, a European monetary fund, of eurobonds whereby the 17 countries pool their debt and issue common paper. The latter is deeply unpopular in Germany, albeit supported by the finance minister, Wolfgang Schäuble. The Germans and the French also recently agreed to establish “common” corporate taxation systems and “enhanced economic convergence”, which will exert a magnetic pull on the rest of the eurozone, and to levy a “Tobin tax” on bank transactions even though the British, for one, will not take part. Much of this is to be finessed and argued over at an EU summit next month. And by the end of the year there will be demands to re-open the Lisbon Treaty to unblock barriers to some of these integrationist steps. The Franco-German call for eurozone economic government is broadly seen as a victory for Sarkozy and a concession from Merkel who may now try to water down her commitment in the nitpicking over detail. The Germans will also exact a high price in dictating the terms of common budget, economic, and fiscal policies if they are to take part. That may be too much for some to stomach. “This may not be politically feasible,” says Charles Grant, director of the Centre for European Reform thinktank. “A fiscal union and eurobonds could help, but it will mean the southern countries giving up economic sovereignty. Berlin could destroy the euro if it goes on like this. “Its over-zealous discipline and austerity medicine is not going to work. Besides all this economic government stuff is irrelevant to the euro crisis. It’s now a crisis of growth, of banking, with liquidity drying up.” The senior diplomat points out that the ambitious plans for European economic government will take years. Time, meanwhile, is not on the EU’s side given the daily gyrations on the bond markets and the plunging fortunes of gamechanging Italy. “The eurozone has been completely incapable of doing anything in an orderly way so far in this crisis. October is the moment when the eurozone government stuff gets real. The plan is to stagger through until the summit and then set the long-term strategy. But the whole Greek situation could spin out of control before then,” says the diplomat who is involved in preparing the summit. There are other big problems. The plans for economic government and ultimately political union apply to the 17 countries using the euro, leaving 10 EU member states outside, although some of them will eventually join if the currency survives. Merkel has always opposed a “two-speed Europe”, not least because the balance of power in the eurozone tilts south towards France and the Mediterranean countries away from Berlin. But she now reluctantly concedes that there is no alternative to closer eurozone government. The decisions will be made here, meaning that Britain and other non-euro countries will be out of the loop. The Cameron government appears to accept this, with George Osborne arguing for the “remorseless logic” of eurozone fiscal union, while scheming to put greater distance between the UK and the EU. There will be inevitable clashes, with Britain objecting to eurozone policy decisions and being told to get out of the way. UK-EU estrangement will become more entrenched. And in a time of growing euroscepticism across the EU, with populist parties hostile to Brussels making big gains at the ballot box in a string of countries from Austria to Finland, the surrender of sovereignty over national budgets entailed in economic or political union will struggle to secure voter support. “The legitimacy question is the issue that will come back to haunt EU leaders if they don’t address it properly,” says Swieboda. “It won’t be sovereignty as we’ve known it with the freedom to shape your national budget while observing the euro rulebook. Getting citizens on board for these new solutions won’t be easy.” But given the Greek experience, the new regime taking shape is almost certain to include provision for kicking countries out of the euro if they persistently flout the rules. Last week the Dutch prime minister, Mark Rutte, became the first eurozone head of government to propose this. “Greece can always choose to leave,” says Grant. “As long as all this is between freely consenting adults, it’s not that undemocratic.” The damage done to European cohesion by the sovereign debt crisis has been immense, leaving deep scars. The poor southern countries are disillusioned by the hectoring and the bullying from their creditors in the north. The wealthier countries footing the bills for the bailouts are failing to make the case to their tax-paying voters. Three governments, in Ireland, Portugal, and Finland, have fallen as a result of the debt crisis. Merkel has lost a string of regional elections in Germany, partly because of the same issue. The newer eurozone countries such as Slovakia, Slovenia or Estonia cannot believe they are having to fund wealthier western countries after going through hell in the 1990s to reform their post-communist economies. All the big surges in European integration of the past 20 years, from the Maastricht Treaty to monetary union to the admission of eight east European countries in 2004, were born of strong EU political leadership largely pulling in the same optimistic direction. That energy has gone. Europe’s key leaders are acting out of fear rather than hope, worried that the EU could unravel if there is not another big adventure in “ever closer union”. The senior diplomat thinks there will be a bit of both. “Some integration and some disintegration.” Germany Europe Angela Merkel Europe European Union European debt crisis European banks Ian Traynor guardian.co.uk