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Split the EU? Europe debt crisis pushes idea into the open.

Splitting the EU – creating a small core of eurozone countries and a looser outer circle – has been taboo. But as Europe debt crisis worsens, France and Germany are discussing the idea more intensively.

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“Traditionally in Europe you would have a debate on austerity,” says a policy analyst and former Spanish diplomat. “But in Spain we are not having a stimulus and austerity debate, and it means we are signing onto a policy that many don’t believe in, and that brings resentment and a psychological break up … if you are part of a project in which you don’t have a voice.

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"Right now, either the markets or Germany dictates solutions … so there is no common political project,” the former official continues.

Financial and social chaos?

In Strasbourg, Sarkozy pointed out that the Balkan nations are now EU suitors, and it is unrealistic to expect that new members of an already 27-member union, should it grow to 33 members, can perform as well as the core of Europe, which has often been considered its northern and wealthier tier.

Former German foreign minister Joschka Fischer also this week advocated a two-speed EU, saying that coordinating 27 nations isn't working.

Yet a split is described by many analysts as more fateful than those looking at the union through a nationalist or purely economic lens consider it to be. Reuters quoted an EU diplomat saying, "This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past 60 years…. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it."

The Economist weighed in this week on the implications of nations leaving the euro and moving to old currencies like the Greek drachma or the Italian lire:

“What is vastly underestimated by advocates of euro exit is the financial and social chaos that would ensue both in the departed country and in the rest of the world…. It would be a gigantic financial shockwave. Once departure by Italy were a serious prospect, there would be runs on its banks as depositors scrambled to move savings to Germany, Luxembourg or Britain, in order to avoid a forced conversion into the new weaker currency. The anticipated write-down of private and public debts, much of which is held outside Italy, would threaten bankruptcy of Europe's integrated banking system.”

Not necessarily so, notes Jean-Paul Piris, a former legal counsel of the European Council, and an architect of the 27-nation structure. Europe after the fall of the Berlin Wall was understandably interested in accepting former Soviet satellites. But its focus on "broadening" came too quickly, and at the expense of "deepening." If the EU cannot in fact act decisively, he argues in the Financial Times Nov. 4, "Far better would be to consider a two-speed EU, which would include an avant-garde group, probably based on the current 17 members of the euro area."

Opponents said a shift to a core group may not solve fallout from the acute crisis of Italy and Greece, who belong to the 17 EU nations that use the euro.

No central banks

Europe’s crisis illuminates sharp divisions in the politics of different eurozone nations that are united by a currency but not a common fiscal policy, analysts say. Neither do eurozone nations have separate national banks, or “lenders of last resort,” like the Federal Reserve in Washington, the Bank of Japan in Tokyo, or the Bank of England in London.

Political economist Jean-Paul Fitoussi commented in an interview with the Monitor last week: Why does Italy or any country have a problem? It has no central bank. If it did, nothing would have happened in the markets.”

“All eurozone countries are vulnerable to market speculation because they have no central bank," says Mr. Fitoussi of the Institute of Political Studies in Paris.  “If the ECB [European Central Bank] steps in and announces solemnly that it is the lender of last resort, the problem would be solved.”

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