The European monetary union has failed as a monetary system and has failed to unify Europe. Like Charlemagne's religious unification, the "unity" that's tied up in the common currency is oppressive and may well fail in the longer term unless serious design changes are made to the system. Interestingly enough, it might be Germany, not one of the so-called Mediterranean profligates such as Greece, that ushers in substantial changes. So what's this problem at the heart of the EMU?
The EMU is not akin to a monetary union that might exist in a normal federation (such as Canada or the United States). It's a halfway house that straddles two stable formations: the federated nation-state and the international alliance. This in-between structure is called a confederacy, and it's something that was tried – and failed – in North America on two occasions, most recently during the American Civil War.
The system's existing institutional shortcomings are becoming apparent to all. As the crisis extends into the core, Germany is increasingly suffering from acute bailout fatigue, as well as an imminent legal challenge in its Constitutional Court relating to the legality of the scale of the bailouts now being initiated. Ultimately, we may well be looking at a solution that will cost trillions of euros.
Of course, the mere mention of a figure of this magnitude will almost certainly make the idea of further "euro solidarity" a harder sale in Germany.
So what would Europe look like were Germany to lead a movement to a breakaway currency? One likely result of a German exit would be a huge surge in the value of the newly reconstituted deutschmark. In effect, the remaining euro zone countries would devalue against the German economic powerhouse. True, this might damage Germany's export sector for a time, but Berlin may well conclude that departure from the existing euro zone is the "least worst" option, given the political backlash of yet more subsidized loans to Greece, Portugal etc.
The onus for fiscal reflation would now be placed on the most recalcitrant member of the European Union. Germany probably will have to bail out its banks, but this is more politically palatable than, say, bailing out Greek banks (at least from the German perspective). In effect, Berlin would be repeating the unification experience of the 1990s, during which West Germany bailed out the former East Germany's banking system.
Similarly, the Club Med countries such as Greece, Italy and Spain probably would attain some measure of economic relief, because the euro plunges and they get to export their way out of their current mess. Spared the rigours of Teutonic fiscal rectitude, the euro would become a soft currency zone, and the remaining members could go back to living with higher inflation, higher exports and probably a more comfortable way of life than what's being experienced under the current harsh fiscal austerity regimes.
Having been one of the euro's early champions, why would Germany now become the party behind the euro's demise?
Recall that there are basically three Germanys: the Bundesbank and finanzkapital, which retains huge phobias about the recurrence of Weimar-style hyperinflation, and an almost theological belief in "sound money"; the "Europeanists," led by former chancellor Helmut Kohl, who essentially argued that you solve the "German problem" by binding Germany ever more fully into a pan-European framework, the currency union being a key part of that; and Industrial Germany, which was willing to enter a currency union because, by construction, the agreement removed the weapon exchange rate depreciation from its competitors (German real wage discipline, labour productivity gains and engineering innovation couldn't be undercut at the stroke of a pen).
It appears, however, that Industrial Germany is beginning to have second thoughts, as many now consider the "costs" of these repeated bailouts as overriding the benefits of having "profligate" Mediterranean countries buying yet more German imports.
In any case, it's time to start thinking about a major reconstruction of the European project. The tragedy ushered in by the current crisis is entering its critical phase, and the nature of the policy response could well spell the death of not just a currency but also a vision for a unified Europe.
The essential problem is that the European Union was founded as a political venture but quickly grew into a (promising) economic venture. The irony is that the lack of a true political union – which would have permitted a unified fiscal policy – is precisely what may well kill the whole idea.
Marshall Auerback, a global portfolio strategist at Denver hedge fund Madison Street Partners, is a senior fellow at the Roosevelt Institute.