Two short years ago, if anyone had suggested that we would be considering pan-European bank regulation, cross-border deposit guarantees, joint and several Eurobonds, and the very survival of the common currency, they would have been dismissed as nothing short of crazy. But what was unthinkable then appears to be verging on the inevitable now. With last weekend's announcement of a bailout for Spanish banks and with potentially euro-shaking elections in Greece this weekend, we can now say with certainty that the staid European Union we knew for its first two decades is a thing of the past.
What we're not yet sure of is just what will take its place. The complexity and breadth of the unfolding European financial crisis, with another imminent flash point seemingly around every corner, have made it particularly difficult to distinguish noise from signal and the valuable data from the spin in each day's headlines. In particular, the news focus on daily -- or hourly -- developments in the crisis often obscures the broader dynamics that will shape the European response over the next few months, which will in turn shape Europe itself over the next few decades.
Here are 12 key trends to watch over the next few weeks for help in projecting what the new Europe will look like if it finally emerges from the mire.
1. Continuing Greek dysfunction. Pundits and analysts are waiting with bated breath for the results of Greece's elections on June 17, with many declaring it as a virtual referendum on whether the country will remain in the eurozone. But here's the truth: The possible outcomes are narrower than people think, ranging only from pretty bad to worse.
If the Coalition of the Radical Left (Syriza) gets the most votes, even with the 50-vote bonus for finishing first, a fractured electorate and lack of suitable coalition partners make its prospects of forming a workable government slim. But even if an ostensibly "pro-bailout" combination of New Democracy and former ruling party PASOK was to squeak through with a collective majority, the effectiveness of their coalition will be severely limited and Greece's future far from clarified. These two parties are once and future rivals, and in actuality they agree on very little. Expecting that they can quickly reach consensus on the specifics of some 15 billion euros in austerity measures over the next two years is highly doubtful.
Any renegotiation of the terms of Greece's bailout, moreover, will be merely a matter of spreading the pain over an additional year or two, ensuring continued political deadlock and a disgruntled electorate. Besides, the math doesn't work, and every day the country remains politically paralyzed, the costs to the country and its creditors increase. The upshot is that regardless of the election's outcome, Greece and its European partners are in for an almost unimaginable set of politically unpalatable choices. The likelihood of an election that definitively ensures that Greece remains in the eurozone is very low.
2. Spanish banks as catalyst. Some in Greece think that Athens can successfully blackmail its European partners into caving and lightening conditions on the country, lest Greece blow up and take the rest of the eurozone with it. They are probably miscalculating. Greece is, in the grand scheme of things, too small to sink the European experiment. But Spain (in part because it is too grande to fail) actually does hold some pretty daunting cards, as demonstrated by the rescue package it received over the weekend. The dynamics to watch now are how Europe's official sector lenders proceed. Although the basics of the Spanish rescue were announced, the plan is far from fleshed out, with crucial details -- like where's the money coming from and on what terms will it be disbursed -- remaining unresolved. When providing Spain its lifeline, policymakers are acutely conscious of the precedent that this rescue will set.
This "conditionality-lite" Spanish program (with the Germans emphasizing the "conditionality" and Spanish Prime Minister Mariano Rajoy the "lite") might conceivably provide political cover for the Spanish government while maintaining the "no money without strings attached" restrictions required by the Germans. It could also, however, catalyze a more far-reaching process of reform: federalizing banking supervision and regulation within the eurozone, the possible migration of bank deposit guarantee schemes from the auspices of national governments to a pan-European one, some form of Eurobonds, and, in the end, fiscal union. Recall that the U.S. Constitutional Convention was held in part because the Articles of Confederation weren't sufficient to resolve conflicts between those states that had repaid their Revolutionary War debts and those that couldn't or wouldn't. The Articles of Confederation's drafters did not envisage a federalized entity any more than the crafters of the Maastricht Treaty foresaw a "United States of Europe." The Spanish banking crisis won't trigger a formal constitutional convention, but it could have much the same effect, setting in motion a more dramatic shift in how Europe operates for decades to come.