The survival of the eurozone intact throughout the past year has been rightly understood as a political and technical achievement. Fears that the euro would collapse, that Greece would exit the zone or that financial markets would pile on unbearable pressures sparking new and massive crises were shunted aside.

Euro structures were kept in place by means of two approaches. The first was defined by a relentless push from Germany and like-minded states for the introduction of a tighter fiscal discipline at national level by eurozone members. On this front too, a multilateral fund, the European Stability Mechanism, was successfully set up for the proper management of country bailouts. There were also efforts to establish new “federal” structures which at end year had taken the form of a fledgling banking union.

Spearheaded by the European Central Bank led by Mario Draghi, appointed governor in late 2011, the second approach was quite likely, more effective in calming the crisis. Early in 2012, the ECB flushed trillions of euros at bargain basement rates into European banks, unclogging the credit system and reversing the growing signs of financial panic.

Then in mid-summer, the ECB declared its resolve to defend the euro at all costs. Both steps were arguably taken at the outer margin of the ECB’s remit, or even outside it. But they were successful to ease the strains of the financial markets on the eurozone, especially on Spain and Italy. Faced with unsustainable and rising interest charges on their state debt, both countries were heading towards a bailout. The ECB’s move damped, even reversed, upwards pressures on their costs to service public debt.

Beyond economy and finance

The hope now is that further incremental steps towards a banking union will mesh in with an improved and rigorous fiscal coordination. The latter is to be carried out in full respect of a balanced budget rule, while sustaining moves towards the establishment of new federal decision making institutions within the eurozone. That would give greater coherence to the management of the zone as a whole, breaking the vicious circle of mistrust about the euro that has characterized its long-playing crisis.

Crucial to the scenario will be the ability of the eurozone, or at least of its major economic engines, to generate growth plus the rapidity with which this is done. The experience of the past decade and a half justifies scepticism. For too long a period, Europe has been trailing in the global performance league. Its growth rates have lagged behind those of most major economic groupings, not just the emerging markets. There is little to show that this can change in the short term.

However, in the present state of play, one must go beyond the economic and financial scenarios to consider the political implications of what has been happening. The trend is towards federalisation, but final decisions will still be shaped by political give and take.

Here, the obvious first concern is whether and how the nation states that make up the European Union will regard federalisation. That there is resistance to the concept from both right and left in many countries is obvious. Not only politicians, but ordinary people as well, are chary of giving up sovereign rights held nationally. This has been the case even when substantial majorities in Europe were in favour of a more united Europe and/or in favour of introducing and keeping the euro.

Moreover, there is wariness about how federalisation will play out. The year 2012 saw a consolidation of German influence on European decision-making. Much of the pretence that there existed some sharing of “power” with France was quietly ditched. Rarely will one find it stated in such crude terms: but the reality is that beyond the restrictions which federalism would impose on national sovereignty, a large proportion of decision-makers and citizens Europe-wide do not want to become dependent on German fiats.

The irony is that in Germany too, quite a huge percentage – perhaps a majority – of the electorate is not at all keen on having their country become part of a federal European system. Frequently, Germany’s mainstream leaders seem to fudge the issue but the proposals they make show clearly that they have decided that federalisation is the only possible way forward. They need time and space for manoeuvre in order to convince the German people of this.

Which is why the date of the German election is probably the most important appointment this year on the European political calendar.

Yet, though the pros and cons of federalisation constitute the most salient aspect of the political scene, I doubt whether they amount to the most fundamental element in the mix. Other underlying issues could bring about divergent attitudes and trends, more difficult to resolve than the challenges of federalisation. They relate to the concept of a European identity and to what a united Europe would really stand for.

The European identity

Some might consider this a strange subject to bring up so soon after the EU was awarded the Nobel Prize for peace. Actually, that award served to confirm the ambiguity that has been allowed to develop around the European project.

For there have been two EUs.

There has been the EU, which, in the aftermath of the Second World War, was constructed to eliminate once and for all the occurrence of deadly wars in Europe that had been a feature of the continent for centuries. That peace objective was attained. A further bonus was that when the USSR collapsed, the EU acted as a very good buffer to contain the resulting instabilities. It provided diplomatic frameworks to accommodate the new geopolitical reality in Eastern Europe.

Then there has been the EU which viewed economic, political and social integration as a strategy by which to reposition the European continent as a superpower, at par with the US and now also China. Its direction became diplomatically hegemonic, through a widening and deepening of membership structures. It avowed neo-liberal economic policies in full acceptance of the globalisation agenda. And increasingly it adopted one-size-fits-all approaches to apply internal and external strategies. The jury is still out on whether these orientations have been really successful.

That many get confused about which EU they are relating to is evident. One could argue that the Nobel Prize citation and its accompanying public relations, themselves betrayed this confusion. The prize was really being given, and deservedly so, to the “first” EU. But then it was justified in terms of helping the “second” EU overcome its internal roadblocks, especially in the eurozone.

It is unfashionable to make such a claim, but I have no problem making it: substantive political choices to confront Europe in coming months and years will be ideological in nature.

Of course, the controversy over federalisation is also ideological. But beyond it, there remains the question as to what Europe stands for. It has accepted market economics tempered by regulation; neo-liberal policies at state and continental levels; as well as globalisation. Yet the ideological compromises struck between the right and the left from the late sixties to the eighties, are still paid lip service, even if they have become rickety or outdated. Furthermore, the impact of the eurozone crisis has totally undermined them.

Compromise and consensus

Few seem to remember that for a long time, the EU (EEC initially) was considered by the left and others, as a project of the right. Socialist and social democratic parties believed – rightly – that though its peace aims for Europe were laudable, its mechanisms were designed on capitalist lines to favour big business. Eventually a compromise was reached by which a social dimension was crafted into the structures of the Union, through regional, social and developmental policies funded at European level. This approach had its own contradictions, but for a time it worked. Later, it was extended to environmental issues.

For a long while, the consensus between left and right on which European policies developed over the years was grounded on this compromise. Perhaps the best living symbol of the compromise-consensus was EU Commission President Jacques Delors, a committed socialist and Catholic, still considered as the best Commission president ever.

Yet since his time, the social dimension of the compromise has been increasingly hemmed in. Neo-liberal policies and the pressures of globalisation took their toll. A significant marker of this state of affairs became the failure of the so-called Lisbon agenda to re-ignite an effective European social strategy.

And now, as confirmed in 2012, the strategy by which the eurozone is ensuring its survival has continued to undermine the basis of the old compromise between the European right and left. To achieve fiscal rectitude, the eurozone has locked itself into a situation where austerity is the only solution.

The burdens of downsizing and restructuring have been dumped on lower income citizens. Unemployment has been “allowed” to fester and grow – which for many on the left is unacceptable. Typically, ILO reports today criticise the anti-social impact that austerity measures are having on the labour force in eurozone countries with the same slant that used to be deployed in the past with regard to developing African states.

In reality, the basis on which the ideological consensus regarding a united European identity was forged between right and left no longer exists.

So, the political debate that Europe faces goes beyond the “mechanics” of how to make federalism acceptable to its peoples – itself a fundamental issue. Just as fundamentally – if not more – Europe will need to focus on how the Union can remain coherent with the definition of its own identity, if it can only ensure the survival of the euro by enforcing a deadly austerity.