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Last Updated: Sunday, 14 May 2006, 15:27 GMT 16:27 UK
How to rebuild the eurozone
Analysis
By Theo Leggett
BBC European business reporter in Brussels

When the European Commission recently opened its doors to the public, it put on quite a show. Bands were playing, there was cold beer on tap, and circus clowns performed for the kids.

EU flag
Does the EU know how to reshape itself?

This was the EU as the smiling officials would like it to be - one big, happy family, a multinational meeting of minds.

But the reality is rather more complex.

Last week, the Commission's president, Jose Manuel Barroso set out his plans to revive talks on the planned EU constitution, which have been stalled since they were rejected by voters in France and the Netherlands last year.

Now, some experts are becoming concerned that without further moves towards political integration in Europe, one of the most tangible symbols of European unity - the euro - could collapse.

Can the centre hold?

Paul de Grauwe, professor of economics at the University of Leuven in Belgium and an adviser to Mr Barroso, fears that a lack of political integration is undermining the single currency project.

If we do not move forward at a political level, then it's quite sure the euro will collapse
Paul de Grauwe, University of Leuven

"I think that in the long run, without a political union, the eurozone just will not hold; there will be too much conflict, too much tension between the different member states and in the end, some countries will want to pull out," he says.

"In fact, I can be even more explicit: if we do not move forward at a political level, then it's quite sure the euro will collapse."

His theory is simple: if member states continue to put their own interests before those of the EU in key policy areas, the economy of the region as a whole will suffer.

That could create tensions between the members of the eurozone, and eventually the system will break down.

The answer, he says, is a much more radical type of union.

He wants to see the EU take charge in areas such as social and budgetary policy, as well as playing a greater role in areas such as taxation and wage policy.

Reality check

The European Commission rejects Mr de Grauwe's analysis. Its spokeswoman Amelia Torres believes monetary union was designed with the realities of EU politics in mind.

"People knew what they were getting into," she says.

Jose Manuel Barroso
Mr Barroso has a hard road ahead

"They knew that we would continue to have 15 national budgets, and they came up with an alternative to not having a single EU budget, which is the stability and growth pact."

But the Commission's views are also open to debate.

Many economists believe that the stability and growth pact - which is supposed to ensure member States keep their national budgets under control - has been thoroughly undermined by the Commission's inability to enforce it.

But not all of them believe greater political union is the answer. Alan Aherne, a fellow at the Brussels think tank Bruegel, agrees that the euro could be in danger.

He thinks the focus should be on reforming labour markets and boosting competitiveness. Otherwise the consequences could be severe.

"If there is a bad economic shock to the global economy, which makes the overall performance in the euro area worse, then I would become pessimistic in the absence of further reform," he says.

Steady as she goes?

Yet another view comes from John Purvis, a British conservative MEP and vice chairman of the European Parliament's committee on economic and monetary affairs. He thinks what is needed is stability - not radical reform.

"The central bank has to be very strict about its criteria for operation," he explains.

"Its just like we had in Victorian times with the gold standard. You have a stable currency that you know where its going to be next week, next month, next year and five years down the track.

Then the national governments can get on and work out their fiscal policies and their social policies to promote growth. But at least they know where the currency stands."

While opinions may be varied, there is no question that this is an argument which is being taken very seriously indeed.

Most experts agree that if the euro were to collapse, the economic consequences for the eurozone would be extremely severe.

But it is likely to be years, if not decades, before its ultimate success or failure can be accurately judged.


SEE ALSO:
EU mired in constitution debate
11 May 06 |  Europe
EU lifts eurozone growth estimate
08 May 06 |  Business
Q&A: EU constitution's future
10 May 06 |  Europe
Brussels sees stable growth ahead
13 Jan 06 |  Business


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