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The Eurozone's Silver Lining

It's become fashionable in the international economics world to raise doubts about the future of the Eurozone, and even the EU itself; for what it's worth (not much), I tend to agree with the bears. No one is predicting imminent collapse, but everyone recognizes that the EU is like the Death Star II in Return of the Jedi: A formidable structure, to be sure, but only half-complete, and open to attack when crisis hits. Most notably, it has a strong central bank that sets interest rates, but the European Central Bank isn't allowed to bail out individual states. And while the members all talk about a union-wide coordinated rescue, in the end Sarkozy, Merkel, and Berlusconi are responsible to French, German, and Italian voters--and so have no short-term incentive to help each other out.

The list goes on, and scores of people have made the bearish case better than I can. But an interesting counter-phenomenon, predicted by the Economist several months ago (sorry, no link), is also becoming apparent: In a complete reversal of the usual political economy, even as national leaders turn inward, their populations increasingly see the EU as their best chance for weathering the storm. The latest case in point is Ireland, whose economy, after years of rapid growth, is at risk of being overwhelmed by widening credit default swap spreads. In response, Irish voters--who infamously rejected the Lisbon Treaty last year--are now in favor of a much stronger EU, according to several polls, complete with a permanent presidency and a unitary diplomatic service.

"I think the dominant factor here is just fear," one Irish EU expert told the Wall Street Journal. "Everyone here is very well aware of what happened in Iceland." Which is another inversion of the EU political economy--whereas before the smaller members were wary of being swallowed into a Franco-German superstate, now they see such alliances as their only chance to avoid collapse.

--Clay Risen