The troubles being experienced by the eurozone are not likely to go away soon. Right from the start, the establishment of the euro was a political project. It still is, embodying the prestige and power of Europe’s most influential elites, political and economic.

Right from the start, the criticism about the euro’s design, usually made by American and British economists, was ignored. This went in the sense that to be viable, a common currency needed to be underpinned by a centrally-determined and unified economic policy, with stringent fiscal controls. Most of the states participating in the euro system did not want this and still do not want it because they rightly consider it would drastically reduce their national sovereignty. They believed they could manage if economic and fiscal policy would be coordinated by following economic and financial management rules laid down in an interstate treaty. They expected that, with a common currency, economic convergence would ensue between the economies participating in the currency zone.

That convergence did not happen. In the medium term, the strongest economies in the zone – roughly grouped around the former deutschmark system – forged ahead; others lagged. The euro itself helped to mask for some years the growing divergence. Because of its existence, laggards could, for a while, live like they were top performers, borrowing, for instance, at very preferential rates while becoming steadily less competitive. Some seem to have borrowed like there was no tomorrow.

Slack data reporting (to put it mildly) about economic and financial out-turns further fudged the emerging problems. Nor did it help that even top performers – like Germany and France – when it suited them chose to ignore the rules eurozone members had pledged to follow. Meanwhile, the economies of the eurozone as a bloc – indeed those of the EU as a whole – were underperforming, compared to the rest of the world. That problem remains with us now.

The launching of the eurozone coincided with the upsurge of free market globalisation. Governmental regulation had everywhere to be light to zero touch. State intervention in economic activity was heavily curtailed. Former transnational or multinational companies became transglobal organisations, having a clout never before seen. And the driving force behind this global system became finance, run by global banks and other financial institutions. Trillions of euros in cash and assets would be positioned according to free market logic in order to maximise revenues and minimise the threat to holders of financial assets.

Against this background, the euro was obviously a winner while the going was good. When the globalised system faltered and the financial crashes of 2007/2008 followed, the eurozone was stuck. The “Anglo-Saxon” critique about how the zone was organised was correct after all. Without a central locus responsible for economic management and control, parts of the system were vulnerable to crises of financial confidence and economic performance. Yet, the rules agreed about coordination of economic and financial policies made it clear all member states in the eurozone would be responsible, each separately, to ensure they remained financially viable. When the push came to shove, such an approach was not tenable. If one member state went under, the repercussions on the rest of the system would be enormous. So, in the case of Greece, then Ireland, then Portugal, the other members of the zone intervened to shore up their financial position. That approach has now been institutionalised. Permanent funds have been set up through the contribution of euro members, including Malta, to lever overstretched euro states. However, fears of financial insecurity played out on global markets have infected the standing of larger eurozone countries, like Spain and Italy.

Given that the eurozone operates a common currency plus harmonised interest rates at Central Bank levels, while the globalised financial system imposes its own harsh, free-market discipline on all players, the instruments available to contain the financial exposures of the weaker eurozone states are few. They have included on-lending to such states at subsidised rates to keep them afloat; agreed austerity programmes by which their public budgets are pruned back to balance; and, more controversially, purchase of their bonds by the European Central Bank.

However, the success of these initiatives is intimately linked to economic performance. Austerity in public expenditure, though fashionable, inhibits growth because the multiplier effect of government spending evaporates and because higher taxes increase costs in the economy, making it less not more competitive. With low or negative growth, the laggard states are still finding it very difficult to bring their finances under control.

Devaluation as a measure to rearrange cost structures towards greater competitiveness over the medium term is, of course, ruled out.

In the circumstances, it is not strange that global financial markets became wary of the situation in Spain and Italy, where economic and financial policy had been slack. That is what the logic of the free market applied on a global scale demands. Protests about the evil of speculation have sounded obtuse. One of the first institutions to start offloading Italian government bonds was Deutsche Bank.

The funds available up to now for the euro system to extend financial support to ailing economies cannot cover extensive crisis support to such countries as Spain or Italy. That, in and of itself, will tend to keep the pressure on. Lengthy discussions took place over the past year in Brussels and elsewhere for the introduction of new rules at EU level covering economic “governance” and the coordination of budgetary policies and deficits. Though they still need to be agreed on and implemented in full, it is already clear they will not be enough.

Strictly speaking, with its present architecture, the eurozone cannot be viable. Unless a systemic overhaul is conducted to centralise its economic and financial management well beyond what has been attempted up to now, it is unlikely that markets will be convinced the eurozone is a sufficiently stable structure. However, the push towards further centralisation still meets widespread political resistance. Not least in Germany, the richest and most powerful euro state, which realises that, no matter how centralisation is organised, Germany will bear most of the costs of a federalised system. Its leaders have made it clear that, if at all conceivable, centralisation – federalisation of the eurozone, if you prefer – would have to entail a serious loss of sovereignty by other member states, including loss of control over their national budgets.

So what are the possible scenarios for future developments in the eurozone during the coming months? The stakes for the power elites, which have conceived and run the euro as a political project are too high. They cannot allow the project to collapse.

In present circumstances, here are four possible scenarios for the future, running from the least to most likely:

1) the eurozone breaks down irreparably, with most members adopting again a national currency, except for a rump of “northern” states;

2) one or two members of the zone are allowed to go into default and leave the bloc, with the remainder strengthening their economic and financial “cooperation”;

3) a two-tier system develops, in which an inner ring of states – led by Germany and France – sets policies for all the rest, laying down stringent conditions under which to allow the others (including one or two that will go into selective default) to participate in decision-making if at all, while obliging them to fully observe any decisions taken within the inner ring;

4) as a first step, a Eurobond system is established to cover a significant percentage of all national bond issues, underpinned, however, by the right of a central authority to oversee and interfere in national budget decision-making. (In effect, this would be a variant of the third option.)

The determining factor in any outcome will be economic performance within the eurozone, about which present expectations are not high. Another important factor is whether political and public opinion among both high performers and laggards will accommodate itself to a drastic revision of the balance of power with the eurozone and the EU. The high performers will have to accept a scenario where, at the end of the day, the eurozone becomes a transfer union, by which, as in the US federal system, there is a systemic transfer of resources to low performers. Meanwhile, the laggards will have to give up a big chunk of their national sovereignty.

This would have been considered unthinkable not so long ago. That it is now on the cards results from the depth of the crisis that Europe faces as well as from the commitment of the current power elites in Europe to the euro as a political project. No wonder that the idea pushed by Germany, for euro states to adopt a constitutional amendment by which deficit budgets would be banned, has gained traction.

At the Malta end, the question is: how would all this impact on the island’s future margins for action? The euro is Malta’s national currency and what happens to it profoundly affects our future.

One could take a stab at considering answers to this question in a second article.

Tomorrow: The need of a strategic vision.