Europe: If this fails, it's time to brace for impact

Your plane is about to crash. What do you do? a) rebuild the plane in mid-air; b) take avoiding action; c) bail out.

There are a few things to bear in mind. The plane has 17 pilots. Some people on the ground are praying you do not fall on their heads. Others are firing missiles at you.

The European summit, which begins in Brussels today, is the 18th "last chance" to rescue the euro. In the past two years, the 17 pilots - and 10 co-pilots - have tried several unconvincing variations of a) and b).

If they fail this week, they may be forced into a combination of c) abandoning the plane and d) crashing-and-burning.

One thing by now should be clear even to the most diehard euro-fanatics. The euro, in its present form, is a failure - a successful failure in some ways, but nonetheless a failure.

The euro did not cause the international financial and economic crisis that began in 2007 and 2008. That was caused by the arrogance and greed of many of the same market players who are now divided between praying for the euro's survival and speculative incantation for its destruction.

But a tree which cannot withstand a gale is doomed. The euro's vulnerability can be blamed on many things: sovereign debt accumulated over decades; Greek insouciance; German arrogance; property gambling by Spanish and Irish banks; computer-enhanced speculation.

Fundamentally, though, the crisis has exposed a crippling design failure in the conception of the single currency. Twelve countries, now 17, decided to create the bloc without the central institutions and rules or the common economic conditions which govern a national currency and a national economy.

All was well until the crisis came. Then, to simplify a little, our 17 pilots found themselves in a crashing plane with 17 different sets of controls.

The European summit, running until Monday if Italian Prime Minister Mario Monti has his way, will seek, again, the right combinations of rescue strategies a) and b).

German Chancellor Angela Merkel is the champion of solution a) - rebuilding the euro in midair. We should never have started from here, she says. We must have a euro with one set of controls; with a central system for controlling national budgets.

Tax and economic policy within the eurozone can no longer be left to national governments. We must become a United States of Euroland.

A report to the summit by the leaders of four European institutions heads broadly in Merkel's direction.

French President Francois Hollande is the champion of solution b) - taking avoiding action. The future is the future, he says, but if we don't act rapidly the plane will crash, with calamitous consequences.

The idea of a more federal eurozone is disliked by many French socialists, but Hollande can probably accept it this week as the correct long-term solution. He will also point out that without immediate action the euro will be dead.

Hollande has already won agreement on a €125 billion ($197 billion) package of "growth" measures. He insists rapid action is also needed to help "virtuous" but struggling countries (Spain and Italy), which are too big to rescue as was done with Greece, Ireland and Portugal.

There must be some fix, he says, to short-circuit market fears (or speculation).

It must be made clear to the markets that the economic weight of the eurozone stands behind even its weakest member.

That does not necessarily mean an immediate leap into Eurobonds (fully European rather than national debt). But it does mean some sort of Europe-wide guarantee of, say, bank deposits.

Monti is broadly in the same camp as Hollande. So are the European Commission, the International Monetary Fund, the British Government, Spain and most of the rest. The Netherlands, Sweden and Finland side with Merkel.

British Prime Minister David Cameron's position is, historically, bizarre.

He has spoken in favour of both a federal eurozone (without Britain) and quick fixes such as Eurobonds. For 60 years, successive British governments have opposed European federalism not just for Britain but for everyone else.

The euro crisis has cruelly exposed the supra-national pretensions of a European Union, in which selfish national interests still prevail. It has also exposed Britain's Eurosceptic pretence that the prosperity of the country is not dependent on Europe.

The crucial figure at the summit may be Monti. Italy and Spain are under sustained speculative attack. If either goes down, the euro, and the world economy, will fall apart.

Monti told the Italian Parliament he would not leave Brussels until he had persuaded the short-sighted German pilot to look out the window and realise she was nose-diving with the rest.

Merkel says Germany can accept Eurobonds in the distant future when Euroland has only one financial pilot (probably a German one).

Can she be persuaded the federal reforms she wants will take years and the euro may - without avoiding action - only have weeks or days to fly?

THE FACTIONS WHAT THEY WANT

The Merkel camp

* Germany, Finland, the Netherlands and Austria. A banking union that would allow a central authority to curb excesses to prevent overspending.

Club Med

* Led by France and Italy, backed by Spain, Greece, Portugal and Ireland. They want the European Central Bank to buy up bonds to push down borrowing rates.

The outsiders

* Led by the UK, with some support from non-euro states. Want eurobonds and guaranteed bank deposits across the eurozone, without interfering in the single market.

- Independent