The Greek debt crisis will change the way the eurozone works, but probably not in the direction that the single currency’s founding fathers hoped.

When they negotiated the 1991 Maastricht Treaty, Helmut Kohl, Francois Mitterrand and Jacques Delors believed that monetary union would lead inevitably over time to a closer political union with more federal governance.

But the flaws revealed by Greece’s fiscal jam seem more likely to move the eurozone in other directions.

OPTION 1: CLOSER GOVERNANCE
In Brussels, predictably, the talk is of the need for closer economic governance, new powers of surveillance for the European Commission and its statistics office over EU states’ finances and perhaps the creation of a European lender of last resort.

Commission President Jose Manuel Barroso proposed last week giving the EU executive new powers to recommend economic reform programmes to individual countries, and to name and shame laggards by sending warnings in cases of inadequate responses.

French President Nicolas Sarkozy has seized on the Greek crisis to revive ideas of a ‘European economic government’ that would coordinate member states’ economic policies and keep the euro exchange rate competitive against the dollar and the yuan.

But Germany, the biggest economy, has made clear it does not want EU surveillance of its own export-oriented policies, which generate big current account surpluses that economists say are partly responsible for widening imbalances in the eurozone.
Belgian Prime Minister Yves Leterme has advocated a European Debt Agency to issue common bonds enabling all eurozone countries to borrow at the same cost.

That too is a non-starter in German eyes, and equally unacceptable to the Dutch and Finns.

Larger fiscal transfers within the EU or the 16-nation eurozone look impossible because of post-crisis retrenchment.

The EU budget is just 0.9 per cent of the bloc’s economic output and set to stagnate or decline over the next decade.

Economists Daniel Gros of the Centre for European Policy Studies and Thomas Mayer of Deutsche Bank have proposed a European Monetary Fund to design and run IMF-style assistance programmes for euro area countries in difficulty.

It would be funded initially by market borrowing and in time by contributions from states with excessive debts and deficits.

OPTION 2: A TWO-CLASS EUROZONE
A two-class eurozone has been a reality since 2004, when EU budget discipline rules applied more strictly to small countries were suspended, then rewritten to avoid sanctions against France and Germany after they repeatedly breached the deficit limit.

The Greek crisis has strengthened that trend, whether or not Athens ends up being bailed out by its partners.

Greece has been placed under EU fiscal tutelage but no such intrusion has been imposed on France, for example, which has a deficit of more than twice the EU ceiling of three per cent of GDP.

Any financial support for Greece is likely to be an ad hoc arrangement, with Germany calling the shots as Europe’s de facto lender of last resort.

Berlin would attach draconian conditions to deter potential emulators.

This two-class eurozone will likely cause resentment and aggravate mistrust between large and small member states, and between North and South.

OPTION 3: RECOURSE TO IMF
A third possibility that cannot be excluded is that domestic politics or the German constitutional court make it impossible for Berlin to join a rescue for a eurozone country in trouble.

Unable to raise affordable funds on the markets, the problem state would face a choice between going to the IMF, defaulting or seeking to reschedule its debt.

Many eminent economists, including some strong supporters of eurozone integration, say calling in the IMF would be the best solution, since the EU lacks the expertise and political thick skin to impose a long and unpopular fiscal adjustment.

But eurozone governments have made such a taboo of bringing in the enforcers from Washington, even if they are led by a European, that to do so now would cause a severe loss of face, sending the message that the euro family was incapable of coping with its own problems.

A default, even of a small economy like Greece, could cause bank insolvencies across borders and hammer the euro on currency markets.

That is why Germany’s political and financial establishment would probably back a bail-out despite public fury.

Such an event might shock the EU into closer economic integration. But it would more likely prompt sticklers for fiscal discip-line such as Germany and the Netherlands to retreat further into national interest policies.

OPTION 4: DEFAULT
The fourth and most improbable option is that a country might be tempted to walk away from the eurozone.

The price of a euro exit would be enormous in devaluation, extra borrowing costs, diplomatic isolation, unemployment, loss of purchasing power and at least short-term loss of investment.

Strikingly, there is no serious disc-ussion of this at the moment.

Debate about temporary or permanent exits from the euro is largely confined to countries and people who opposed monetary union all along and forecast it would end in tears.