More Power to Brussels: Crisis Forces Europe to Unite on Financial Reform

Austrian Finance Minister Josef Pröll felt tired but jubilant when he returned to his hotel on Place Jourdan in Brussels late last Monday evening. For hours on end, he and his European counterparts had been given a detailed presentation by European Council President Herman Van Rompuy and his task force on how the shaky monetary union could be stabilized and crisis-ridden Europe could be put back into shape.

The finance ministers listened attentively before going on to discuss the issue. But instead of rushing headlong into the usual squabbling session, a cozy feeling of harmony spread through the conference room.

German Finance Minister Wolfgang Schäuble found words of praise for his new "highly constructive" British counterpart, Chancellor of the Exchequer George Osborne. Osborne, who has a reputation as a euroskeptic, in turn described Brussels' plans, which London had until then rigorously opposed, as "not bad."

Afterwards, over a glass of red wine at the hotel bar, Austria's Pröll, who has always been somewhat critical of Brussels, enthusiastically said that the EU is more or less implementing "what we have been discussing for years." He said that the European Union was about to take a "quantum leap" that will "fundamentally change Europe."

Relinquishing Power

The politicians appear to be determined to make up for what they have neglected in the past. A monetary union cannot succeed in the long term if every member state simply pursues the economic policies that suit its own interests. This is something that economists have always known, but it has never been politically feasible: Euro-zone member states were not prepared to relinquish more power to Brussels.

That has changed since the euro crisis shook the monetary union and the realization sank in that things cannot continue as they are. Suddenly there is talk of an "economic union" and even the necessity of an "economic government," yet there is no sign of the usual outcry.

At the meeting last Monday, finance ministers said again and again that "more Europe" is needed -- and for the first time, most of those present apparently meant it.

The next day, the finance ministers launched a series of ambitious initiatives. They decided to establish a trio of agencies to regulate European banking and stock markets and to initiate a joint financial policy. On Thursday of this week, European heads of state and government will meet in the Belgian capital to discuss the next steps. Furthermore, before they gather for their subsequent summit meeting in late October, EU leaders intend to put together a complete program to make the European Union stable and secure for the future.

Regulatory Zeal

The proposals that Rompuy's task force and the experts from the European Commission have already compiled are listed in a confidential document drawn up for an EU prime minister. They consist of 10 pages, jam-packed with additional procedures, new regulations and severe threats of penalties. Measures range from tightening up the Stability Pact and reducing "excessive inequalities" in Europe's economies, to controlling and taxing the banking sector and monitoring national budgets.

According to the usual political reflexes, such regulatory excesses by Brussels' eurocrats would normally immediately lead to trouble. There's not much indication of that this time around, though -- in fact, the report's "conclusions" state that in Europe's capital cities there is a feeling of belonging to "a community that shares a common destiny." It goes on to say that those who distance themselves from this new sense of public spirit will find themselves "increasingly isolated."

Berlin is also striking a similar -- and equally unusual -- tone these days. Suddenly the government is sounding self-critical. "A common currency places greater demands on us than we had originally thought," said an official in the Finance Ministry. Up until now, no matter who was in power, whether it was Gerhard Schröder or Angela Merkel, the Germans have preferred to keep the core areas of their financial and economic policies out of the hands of the EU.

Sheer Fear

The EU has come further over the past few months "than over the past 10 years," says a delighted Jean-Claude Juncker, prime minister of Luxembourg. Indeed, European Commission President José Manuel Barroso is already rhapsodizing that the monetary union is now underpinned "by a genuine economic union."

The new enthusiasm for European solutions arises from sheer fear. "We have seen the abyss, and it has changed us," says Austrian Finance Minister Pröll. He says that no head of government or finance minister can forget the weekend of May 7-9 this year. Greece stood at the brink of bankruptcy and other countries were starting to teeter. A bankruptcy would have dragged down other countries and possibly torn apart the monetary union. Hundreds of billions of euros had to be scraped together overnight to prevent a continental meltdown. "During these hours," says Pröll, "a new European community was born."

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• Part 1: Crisis Forces Europe to Unite on Financial Reform
• Part 2: Markets Are Still Extremely Nervous