Here are large extracts from the book I wrote with Ingo Walter on the origins of European monetary union and financial integration. The cover of the book is from a statue of Europa and Zeus, made by my wife Heidi, and in our garden. The statue appropriately is covered with ivy.
I attach the url from Amazon.co.uk of the book:
Go to “Look Inside” and large chunks of the book are available, with a covering statement that all is “copy right material”. I attach here the epilogue which has stood the test of time well, particularly in the light of developments since 2008. Three chapters on the main national financial systems and their evolution are placed in the section of chapters from books on this blog. This is the epilogue, which we wrote as an interim conclusion.
At the time, the dominant idea on monetary union was that political systems of the member states would adapt to the economic pressures unleashed by the process of EU integration, and the broader developments in the world political economy. In this epilogue, we question this.
It is true that monetary union and an EU wide financial services regime required that a long list of policies be implemented in the member states, not the least of which would be a liberalization of labour markets. This did not happen. More recently, Chancellor Merkel has spoken of the process of deepening of political integration among Euroland members. That is what has to happen if the Euro is to be sustained. Our remarks here though cast doubt on any supposition that this can be achieved in a reasonable timeframe–reasonable in terms of being able effectively to deal with the disastrous unemployment figures piling up in Latin Euroland. As we wrote in 1997: “The fundamentals of the EU project are thus both shaky and speculative.”
Given the long and painful path toward financial integration in Europe, it remains to suggest a few conclusions and signposts for the future.
EMU and Financial Integration Completion of the transition from discrete and competing financial systems embedded in the institutional and political fabric of the member states to a European financial area under a common regulatory framework and authorities still lies ahead. As in earlier decades, the states of Western Europe have sought to reconcile the maintenance of a stable exchange rate regime with residual discretion in national policy. But in contrast to previous attempts at monetary union, the criteria and timetable this time was ratified by all EU member states as a token to their commitment for “an ever closer union” of states and peoples. The broad design was for a single currency, managed by one central bank, with sole responsibility for a monetary policy that in turn required extensive coordination of fiscal policy. As envisaged by many, this macro‑stream for Europe was to end in one unified financial market regime, largely inspired by “Anglo‑Saxon” criteria of consumer sovereignty, shareholder-orientation market and transparency, with world markets operating to reinforce convergence on common ground-rules in what promised to be the world’s largest internal market. With the political commitments made, the project’s supporters would argue that the train has left the station. Most likely, the start of the new millennium was foreseen as a Europe of the ins and outs, with the former benefiting from lower transactions costs, improved capital allocation and the economic dynamism likely to come with it, including hopefully a vibrant pan‑European equity market and a much more active market for venture capital that will help to propel Europe once again to the front ranks of some of the world’s cutting‑edge industries.
Such a transformation, of course, comes at a price, as the exchange rate disappears as a policy tool, and monetary policy is subordinated to the interests of the whole, as fiscal policy migrates from national environments to the level of the EU, and as the political costs of these developments become increasingly evident. An optimistic view holds that some of these costs have already been incurred, and the system has been stress‑tested during the recession and currency crises of the early 1990s. So the remaining hurdles seem surmountable.
We beg to differ. Our analysis of the national financial regimes, and the complex negotiations to create the European financial area hints at an alternative future. In this view, national regimes continue to evolve within their own logic, rooted in specific historic constellations and the cumulative layers of reforms and adaptations through which they have passed. Lessons from history in each EU country vary according to fashion or to the problems of the hour, while initiatives imported from other regimes and systems remain inevitably partial. National financial regimes imply national financial systems, which have in turn been characterised by specific forms of regulation, corporate governance, and bank‑industry relations. They function optimally in their own governmental structures and labour markets, such as Germany’s inclusive stakeholder arrangements or the hire-and-fire approach introduced in the U.K. in the 1980s. They are anchored in their particular national currencies, which stand against each other on the global foreign exchange markets.
World markets in such conditions help to perpetuate national forms of capitalism, rather than to lead them to “converge” on a single norm. An international regulatory regime covering a diverse mosaic of financial systems such as exists in Europe is much more likely to resemble the detailed and ambiguous negotiated outcome of the European financial area than an idealized caricature. Indeed, the durability of national financial systems and regimes suggests scepticism about the prospect of a rapid break from past experiences, especially when efforts to sustain stable exchange regimes¾whether in their own right or as preludes to union have regularly broken down. There is no obvious reason to consider as credible the claim that the achievement of nominal convergence on the basis of the Maastricht criteria among a select group of member states presupposes an ability of national polities to adapt their institutions one to another without great difficulty. Financial systems and corporate practices are more likely to converge under the pressure of competition in the global markets and through the implementation of the European financial area legislation over the coming decades.
That lengthy convergence is likely to be extremely turbulent, given that the EU’s social policies remain national rather than supranational in content, form and identity. Clinging to nominal convergence criteria while maintaining existing national systems implies continued high unemployment across the EU. Fiscal transfers through the so far diminutive EU budget the pools of nationally unemployed that are likely to accumulate, within a fragmented economic space under a single currency, are resented and fought-over. The fundamentals of the EU project are thus both shaky and speculative. Furthermore, Western Europe, as the first chapter suggests, has been prone over the past decades to progress by muddling-through, postponing settlement of differences, settling on incremental changes, and resisting temptations to dramatise disagreements. If differences were deep and required settlement, they could always be reintroduced in more favourable political circumstances. Playing on the factor of time proved to be a crucial ingredient in the dynamic consensus which went under the broad concept of “integration.” With German unity, as discussed in Chapter 3, all that changed. Maastricht made “irreversible” the commitment to move to a single currency, where the Germans would surrender the DM in return for French support for a constitutional design in the EU compatible with the principles laid down in Germany’s Basic Law. This was to be accompanied by progress in the definition of a common foreign and security policy, and in implementing a common social policy. Progress on all fronts has been elusive. But the commitment to a timetable suggests that all major unsettled business in Europe must be resolved by 1999‑2002. Maastricht, quite simply, has deprived the weary EU policy process of its necessarily opportunistic use of the future to focus on present disagreements. The EU policy process is, therefore, quite likely to deprive Maastricht of some of its promise.
Sources of Change in National Financial Systems
National financial systems in the EU remain distinct but dynamic in response to broader changes in society and markets, in the composition of national policy communities, in the style of public or corporate policy, and in the context of world politics and markets. • They have adapted as occupational structures, evolving technologies and ageing populations have produced more demanding clienteles. They have been transformed by inflationary growth policies which undermined the fixed exchange rate regime of the 1960s, and diverged as a result of differing streams of policy that led to restraints on the development of Germany’s equity markets, to the inflation‑cum‑devaluation cycle of France’s overdraft economy, and to the undermining of the U.K.’s archipelago of financial cartels by the evolution of parallel markets, followed by empirical efforts to regain control. •
The composition of national policy communities has changed over time, with alterations in bank‑industry financing, in government regulation, and in the growth of capital markets. A shared trend in Germany and France has been towards the bank‑cross‑shareholding system presented in stylized form in Chapter 5, while Great Britain from 1979 at the latest confirmed its equity‑based system. Germany’s stakeholder institutions and laws have been adapted as the savings and cooperative banks have moved to the fore, the “Big Three” banks have campaigned to make Frankfurt Germany’s pre‑eminent Finanzplatz, and Allianz and Munich‑Re have occupied centre place in Germany’s tangled web of bank‑industry cross‑shareholding. France’s state‑led financial system has evolved from its segmented and bank‑based format inherited from the 1940s to a hybrid predicated on a dominant capital market in Paris, and mixed ownership bank‑industrial cross‑shareholdings, where French insurers also occupy a central place in the “inextricable interpenetration” of state and corporate interests that lies at the heart of France’s political marketplace. By contrast, the transformation of Britain’s lightly regulated financial cartels into regulated and competitive retail and wholesale markets has confirmed London as Europe’s “city of capital,” host to financial institutions from the EU, the U.S., Japan and the rest of the world. •
Styles of public policy and market discourse have evolved as regulators and market participants adapted to opportunities, learnt from past mistakes, and indulged in the process of selective emulation. Great Britain’s public discourse of competitive and regulated markets, absorbed in part from U.S. experience, became the standard fare of the EU’s internal market programme, but modified in practice by the public policy style of experimental learning by doing, referred to in Chapter 8, and by the Treasury’s preference for host-country control and international regulatory co‑operation that flowed from British goals of internalising global markets in London. Germany’s “organised liberalism” was also injected into the regulatory discourse of the EU’s internal market programme, while the inclusiveness of Germany’s federal policy process and stakeholder system drove the pace and content of financial market reforms, as discussed in Chapter 6. As in France, the thrust of German policy was to preserve a national brand of European capitalism while negotiating the foundations for an EU‑wide regime. France’s idiosyncracy was to introduce its own version of “the German model” into its own potent brew of corporatist, nationalist and Marxist policy strands, while borrowing from U.S. experience on capital market development. •
The changing context of world politics and markets provided national financial systems with opportunities to survive and permanent incentives to adapt. The rhythm of national policies and performances¾presented in Chapter 2¾has been dictated first and foremost by the dollar, as the world’s key currency, which provided the enabling conditions for a stable exchange rate regime in the 1950s and 1960s, the shift under President Nixon’s administration towards a world of floating exchange rates and dollar‑based world financial markets, and then starting in the 1980s the swift turnaround in those markets from credit‑based activities to securities markets. Latin American debt crises of August 1992 reinforced the shift in British, French and German financial policies to adapt financial markets to new conditions in London, Paris and Frankfurt. The exponential development of wholesale capital markets was driven by the growth of government and corporate bond markets, as the U.S. and European states vied for world savings. This was the context in which the DM emerged as the world’s second reserve currency, the Bundesbank became Europe’s de facto central bank and power in the economic policy debates shifted to Germany.
Growth and Transition in the EU Financial Regime
The founders of the EU insisted on the creation of institutions which could, outlive anyone toiling in the fields of European integration, and embody the determination of the EU’s founders to overcome the continent’s fragmentation, identified by many as the source of the continent’s ever more savage wars. The history of establishing a financial service regime bears witness to their conviction, as the 1961 EU Council programme, discussed in Chapter 2, in effect had to wait until 1985‑86 before acquiring programmatic form and content. The reasons for delay lie in the aforementioned multiple incentives for financial systems to survive and adapt. The French and Italian financial policy communities, for instance, were unprepared to relinquish control over new issues on national capital markets, while initially there was adamant opposition in London to regulation from Brussels. As a result, the EU’s mercantilist states were unprepared to jointly confront the world of competing currencies, frenetic bank lending to developing countries, inadequate monetary controls and struggles for market-share which followed on Nixon’s crucial decision in August 1971 to put an end to the dollar’s convertibility into gold, thereby terminating the U.S. economy’s role as anchor of the world financial system. EU member states responded in their own ways to new conditions. Germany successfully isolated its financial system by floating the DM freely on foreign exchange markets, clamping down on domestic consumption, raising exports, and incorporating trade unions into corporate decisions. But the member states also cooperated in the development of EU institutions, such as the European Council or the Bank Advisory Committee. When did this pre‑transitional period end, out of a “non‑system”¾as French commentators called the post‑1971 years towards a negotiated pact to create the foundations for a new EU‑wide financial regime? 1982‑83 marked the turning point, with the rapid shift to securities on world financial markets, the creation of the Internal Market Council, the changes in government in Bonn and of policy in Paris, capped by the re‑election of a radical Tory administration in 1983. The German Finance Ministry and Bundesbank, with the support of the “Big Three” universal banks, began their prolonged campaign to revitalise equity markets in Germany. Meanwhile, Mitterrand’s first government, faced by an explosion of foreign debt and a collapse in national savings, accelerated bank and financial market reforms in order to ease the constraints on financing France’s extensive public sector and its welfare commitments. And the British government, facing no effective opposition and politically defenseless brokers, jobbers, merchant banks and discount houses, pushed through a set of radical regulatory reforms which transformed the inner workings of the British financial system. With varying motives, the EU Commission, member states and major corporations allied on a common platform, based on the Commission’s “new approach” to reduce non‑tariff barriers within the EU. The decision phase marking the transition from discrete national regimes to an EU‑wide regime spans the decade of negotiations between 1983 and 1993. The results of these prolonged and complex negotiations yielded benefits for national regulatory authorities, big institutional investors, the wholesale financial markets, and London in particular. They provided an additional incentive for France and Germany to accelerate reforms of domestic markets and practices, and opened up banking, securities and non‑life insurance to cross‑border trade.
As measures moved towards retail financial markets, the sensitivities of national authorities became more evident. Arguably, none of the legislation saw a clear victory for the home-country principle, as the member states negotiated a host of clauses into the directives reserving host- country authorities discretion. As we have argued, member states were not prepared to surrender powers over financial firms making decisions within their national jurisdictions that might effect “the public interest” or the ability to compete in world markets. But they were prepared to “pool” joint powers of supervision of markets within the EU infrastructure of committees while keeping the Commission at arms length. One aspect of the multi‑dimensional chessboard on which the commitment to move to an EU wide regime was played out was in the bureaucratic battles in the EU, in bilaterals, or in other multilateral fora. There was broad agreement to promote universal banking, to foster bank‑securities-insurance universals, to legislate extension of regulatory reach beyond the national level, and to negotiate for transition periods which provided time for necessary domestic changes in markets structures to be pushed through. All participants, with the notable exception of the British, sought to ease access to others’ markets while limiting access to their own. Their positions were riddled with internal contradictions, which stood in often stark contrast to their vaunted role as champions of EU integration and that derived from their need to protect or to promote a host of domestic interests. The fundamental flaw in the French negotiating position was to seek to prevent the internal consolidation of a financial system for a united Germany, while continuing to implement the French version of the “German model” in order to protect national rights of ownership and ensure the Tresor continued access to its privileged financial circuits. The U.K. negotiated to open the EU markets to investment services, but balked when the French and German joined to promote a federal EU, requiring extensive surrender of national powers to joint EU institutions. Germany vaunted its European vocation on monetary union and a common foreign policy, but plied a distinctly national path with regard to financial markets.
There was no let-up during the definitional phase in the competition for market share between London, Paris and Frankfurt. London had the advantage of first mover in the introduction of futures markets, and then of SEAQ International, pulling-away trades from the secluded and less efficient continental markets. This galvanised competing centres to update their technologies, their settlement systems or their regulatory frameworks. Paris, like London, opened its markets to Anglo‑American financial firms, sought to expand the liquidity of the markets and moved slowly to privatisation of French state enterprises. German financial reforms progressed more slowly because of the multiple interests that demanded attention, but were driven forward by the determination of Frankfurt’s reforming coalition of banks, by the continued growth of the bond market, and by fear of losing equity and derivatives trading to rival centres. But institutional sensitivities circumscribed reforming zeal in both continental centres. Corporate governance in both Germany and France was ill at ease with the signs of growing shareholder activism, which placed in doubt the prerogatives of managers and workforces. Sources of financial market liquidity were hindered by broad political resistance to any tampering with inherited pay‑as you‑go pension schemes. Indeed, one of the major reasons cited for continued national protection of retail banking markets and life insurance was avoidance of foreign exchange risk for small investors. Both France and Germany therefore were in accord to protect their national brands of European capitalism, pending the big leap to monetary union.
Up to that moment, their financial systems would remain, as they had been in the past,service providers for retail customers and national corporations competing on European or world markets. Both financial systems provided incentives for firms to compete for market share, rather than profitability, and translated into national mercantilist priorities. All key candidates for the first wave of monetary union, led by France and Germany, run persistent trade surpluses. Once in monetary union, though, the urgency of shifting corporate policies rapidly in the direction of a pronounced emphasis on shareholder value is likely to be accentuated. The resulting turmoil in labour markets is likely to be extreme unless monetary union is swiftly followed by a surge in growth as business people respond to new opportunities. Equally, monetary union may well spell the death of national bank‑industrial cross‑shareholding structures, given that the EU principle of non‑discrimination on nationality grounds is bound to be upheld in law with regard to ownership structures and the search for cheaper equity capital opens-up shareholdings to new and more performance-oriented global investors. It is in this sense that Great Britain’s is by far the most “European” of all national financial regimes.
Europe and the Structure of Global Banking Firms
Financial integration in Europe will proceed quite irrespective of the movement toward EMU. The reason is that wholesale finance has progressed far down the globalization path, and obstacles such as national currencies can be easily surmounted, and in some cases present as many opportunities as challenges for financial institutions. Banks and securities houses thrive on imperfect markets, and market imperfections are often the products of government policies that create fault‑lines across markets. Yet exploitation of market imperfections itself carries with it an inevitable progress toward more competitive markets, and this dynamic will prevail regardless of the specific features of EMU.
We have concluded that the universal bank has emerged as the dominant form of financial organization in Europe, the only exception being the British tradition of merchant banking and the French Banques d’affaires. By 1996, however, most of the British merchant banks had been acquired by European universals, Morgan Grenfell by Deutsche Bank, Kleinwort Benson by Dresdner Bank, S.G. Warburg by Swiss Bank Corporation, Hoare Govett by ABN Amro, and Barings by ING Groep. With Smith New Court having been acquired by Merrill Lynch, this left only Robert Fleming, Schroders and Rothschilds as the remaining merchant banks, with the latter having established a strategic alliance with ABN Amro. In France, the sale of Banque Indosuez to Credit Agricole left only Banque Paribas and Lazard Frères as the remaining banques d’affaires, and the major French universals consolidating their positions in the domestic investment banking business. In Spain and Italy too, such institutions as Santander and San Paolo di Torino are developing their securities activities.
So universal banking as a structural form of providing financial services seems to have captured Europe.1 As is often the case, however, every victory is only a ticket to a new and even more challenging contest, as the European universals enter battle for dominance with the major U.S. integrated investment banks as well as commercial banks that have made the transition to investment banking, notably Bankers Trust and JP Morgan. And if U.S. restrictions separating commercial and investment banking are repealed or further undermined by judicial or regulatory actions, there will be more of these. The resurgent Japanese banks and securities houses, likewise subject to deregulation at home, will likely be back in the global fray in force toward the end of the 1990s as well.
So far, the Americans have dominated the field. Data on market shares and league tables of firms engaged in the international wholesale banking is necessarily partial in coverage. However, available information suggests that much of the market is highly competitive and contestable, even though in some areas market structure is quite concentrated. The accompanying exhibits show 1995 market‑shares and their evolution over the period 1990‑95 in international investment banking (underwriting of equities and fixed‑income securities plus mergers and acquisitions) and international syndicated lending, respectively, for the leading banks and securities firms. This composite league‑table represents a rough guide to the various banks’ prominence or visibility in the market. Note that, of the top‑10 firms, all were American except for one (CS First Boston), which was partially American. The top‑20 listing contains a more varied mix of U.S., European and Japanese firms¾but again with three‑fourths wholly or partially American. U.S. securities firms have achieved a disproportionately large share of international business in this industry. How this will develop in the years ahead as the industry consolidates globally remains to be seen.
The Herfindahl Index2 shows that market concentration has roughly doubled for the top‑10 firms during 1990‑95, and increased by about 50% from 1992 to 1995 for the top‑20 firms. Note that the European universals are far more heavily represented in the second 10 than in the top‑10 firms, and each of them has expressed an interest, either explicitly or implicitly, in being among the top global players early in the new millennium. As mergers and acquisitions in the industry occur, including further purchases of investment banks by universals and development of selected lending capabilities by the major U.S. investment banks, many observers believe that universal banking will be the dominant form of organization of global financial institutions in the years ahead. If so, the European form of organization will have won again¾this time in global wholesale financial markets¾and with it will come all of the strengths and weaknesses associated with universal banking. Even for the United States this will represent a trip “back to the future,” returning to the universal form of financial institutions (appropriately adapted to today’s conditions) that existed before 1933.
Europe and the Global Pattern of Corporate Governance
Whereas the European form of financial institution structure may well become dominant among global firms in the 21st century, this is unlikely to be repeated with regard to the continental European approach to corporate governance and state exercise of management influence through government and bank shareholdings. This is not inconsistent with financial liberalization and the wider use of securities markets by continental European corporations or with increasingly performance-oriented portfolio management on the part of mutual funds, insurance companies and other institutional investors. Both appear to be leading toward a gradual shift away from bank finance, and a weakening of tight industry‑bank relationships. There have already been the beginnings of unwanted takeover attempts in continental Europe through acquisition of shareholdings by unaffiliated (often foreign) investors.3 There have also been a number of embarrassing lapses in the role of banks on supervisory boards of non‑financial corporations in continental Europe, casting doubt on the efficacy of the classic “insider” relationships between banks and industry. At the same time, easing of bank activity-limits in the United Kingdom and the United States is allowing them to play a larger role in industrial restructuring transactions, and to exploit some of the information and relationship advantages they have as lenders.
Gradual convergence of Anglo‑American style capital‑market orientation and Euro‑Japanese style bank‑firm linkages will test the relative merits of outsider and insider systems that is, the importance of information asymmetries against the free market’s capability of allocating and pricing capital both within and across national frontiers. And the rapidly growing role of mutual funds and pension funds in the United States and in Europe, where the unviability of existing pension arrangements in coping with on‑rushing demographic changes will be a challenge of epic proportions, will challenge the European pattern of corporate control with much greater activism and orientation to shareholder value on the part of institutional investors. It is here that the Anglo‑American approach is likely to undermine the traditional continental European ways of doing things within an increasingly integrated European financial playing‑field.Meantime, the transformation economies of Eastern Europe are casting around for appropriate models to speed economic recovery after half a century of failed experimentation with command economics. They too are likely to “buy into” the emerging pattern of universal banking and contestable patterns of corporate control likely to characterise Europe and the United States.
Timing of the Transition We have sketched some of the many facets of fundamental changes that would have to sweep through the EU as national monetary and financial regimes are supplanted by a wider EU‑wide regime. When is that likely to occur? The official timetable indicates that the starting date for consolidation of a European financial area will begin at the latest on January 2002. But between now and 2002 the member states will navigate in waters that simultaneously promise to sweep them forward into a new and qualitatively different EU, or to keep them swirling around in the repetitive cycles of the past fifty years, punctuated by efforts to promote a fixed exchange rate regime or monetary union and constantly undermined by divergent policies and performances among competing mercantilisms. The following conclusions would appear to be compelling, and point the way forward:
• In the past, German universal banks have had a lock on DM bonds; both domestically and offshore. U.K. and French financial institutions have not had a comparable advantage. If EMU goes through, such distinctions will disappear and all banks will be competing in a highly liquid market.
• The future European financial marketplace will be composed of vigorously competing centres, which will have to provide a broad range of services or disappear into niche positions. This is a major problem for Frankfurt as an end to the DM bond market means that institutions operating in that environment will have to offer financial services equivalent to competitors elsewhere. That already means that the Bundesbank has yielded to pressure to allow development of active money markets¾not least because of the funding requirements of government.
• There is no indication so far that financial markets have had consistent success in effectively pressuring governments toward fiscal balance. Under a single currency and with a relatively independent central bank, as we have argued, German, French or U.K. bonds will be rated and priced as if they were New York or California bonds in the U.S. municipal markets. This will place significant constraints on public financing throughout the EU.
• Highly liquid markets and contestable financial markets will provide corporations throughout the EU with a new range of opportunities for external financing, but those opportunities are likely to go hand in hand with greater scrutiny of management and work-force performances. Shakeouts, downsizing, management accountability and shareholder value along Anglo-American lines will thus continue to permeate Europe. • Social policies remain national, So intensified competition spells dissolution of national cross‑shareholdings, and an end to quasi-permanent credits generously to corporations, on a relationship basis, which fail to earn adequate returns for performance-oriented shareholders.
• In turn, the pressures for greater accountability spells further moves in France and Germany to Anglo‑American accounting, intensified political debates on corporate governance, growing pressures to develop Europe‑wide interest groups and political parties to martial demands and convert them into policy through the Euro‑policy process, and increasingly tough bargaining in the Council of Ministers. In short, financial integration and EMU represent a revolutionary programme which promises to denationalise market structures, and blow open national bond markets/ cross‑shareholdings, impact labour markets and transform national politics.
Are the today’s European political and business leaders quite so revolutionary? Probably not. Germany does not go for “Big Bangs,” and prefers to do things consensually. France is ambitious, but existing arrangements and commitments weigh heavily. The U.K. is probably the best-prepared, but lacks political support for the leap into the full set of EU commitments. Meanwhile, France wants to Europeanise Germany, whose political leadership in turn wants to oblige business leaders and the general public who abhor financial instability and the prospects of inflationary Euro-policies beyond their control, even as Britain is having to choose to be in on the ground floor or wait and be nudged sideways in what promises to be a political struggle to decide who wins in the “battle of systems.” The prospect of repetitive cycles stretching into an indefinite future provides a central motivation to cash-in the political capital invested in the EU’s most ambitious project to date. Indeed, monetary union is seen as a catalyst for future initiatives toward political union. By contrast, the Bundesbank has argued that for monetary union to succeed, it has to be sustained by a polity capable of absorbing the inevitable and perhaps extreme tensions associated with such a revolutionary step.
Only the existing states now have the legitimacy which enable them to answer to the central political question: By what right do you rule? The EU institutions have little to none. It is therefore reasonable to argue that a less ambitious path to a more integrated Europe, one that resorts to the tried and tested EU negotiating technique of using the future as a place to locate present disagreements, may prove more capable of sustaining the prolonged passage which lies ahead to consolidation of the EU’s single financial area. Between these two positions there is no obvious meeting ground. Faith and reason are no longer distinguishable in the politics of the EU financial area and monetary union. Endnotes