The European Union shut down for the Easter break feeling rather good about itself. Last week, the European Parliament completed the main assembly work on an armoury of legislation, including a putative banking union, to prevent a repeat of the chaos caused by the June 2008 financial crisis. After years of rejection, the bond markets wrapped the EU’s crisis economies into a cautious embrace, allowing Greece to issue debt at stunningly low yields, and Portugal and Italy to enjoy similar privileges. And the Union, in the shape of its foreign affairs chief, Catherine Ashton, sat at a negotiating table in Geneva on equal terms with the United States and Russia attempting to unravel the crisis in Ukraine.

If the gods could add a high turnout in the European Parliament elections to these blessings, followed by a humiliation of the extreme populist parties of left and right, then the Union could feel that it had arrived at Winston Churchill’s “bright sunlit uplands”. The reality is that these uplands have rarely been more distant. The eurozone is still urgently in need of properly sound foundations, and will remain so without a fundamental change of political attitudes. Sadly, Europe’s flame of political will is a weak one and easily extinguished by confident and determined adversaries. Vladimir Putin, Russia’s president, is steadily burying post-Cold War assumptions that all would be harmony from Lisbon to Vladivostok. He appears certain that the EU will not find sufficient internal cohesion to check his attempts to expand Russian territory and influence.

Political will is soon to be challenged from within. The eurozone’s third- largest economy, and most dangerous basket case, Italy, wants to be granted a more flexible approach to applying the disciplinary rules on debt and deficits. The request was made in an unwelcome letter to the European Commission from Italy’s finance minister, Pier Carlo Padoan. A familiar figure in and around Brussels as a former consultant to the Commission and chief economist at the Organisation for Economic Co-operation and Development, Padoan’s request for an extra year’s grace to achieve previously agreed budget targets caused upset but no surprise in the Commission.

Padoan has form as a consistent critic of austerity policies. Only a few weeks after taking office, he has concluded that Italy should not remain locked into the fiscal policy straitjacket imposed by the Commission and the Eurogroup. Padoan wrote that Italy needed more flexibility to allow it to add €13 billion to the debt repayments that the government intends to make to the private sector. This would require the state to raise its overall debt level for a short period. It would also look suspiciously like a Keynesian injection of demand into the economy.

Expect the Commission and the eurozone to be torn between the traditional tolerance extended to member states who plead vital national interest, and the need to uphold new tenets of eurozone governance. Since 2012, a defensive thicket of surveillance and co-ordinating processes has been planted with extra policing powers for the Commission and big fines for serial offenders. Will the credibility of the new governance arrangements be seriously damaged by giving way to Italy?

There are other things to think about as well. The new government, led by Matteo Renzi, may be worth helping because it is trying to pass a package of structural reforms of the kind that the Commission believes is a sine qua non for economic recovery. Five years of steep economic decline have bred a strain of Euroscepticism to which Italy once seemed immune. It will not be reduced by preventing the government from paying off a large slice of its debts. The Commission has promised a reply on June 2, safely after the European Parliament elections.

Those taking a strategic view of the eurozone’s dilemma will see the Italian problem as underlining the weaknesses of present arrangements. They nearly all derive in one way or another from member states’ preference for the ‘all for one’ solution over the ‘one for all’ necessity. In other words, when cohesion is required, preservation of national treasuries takes precedence over risky commitments to other member states. The new banking union does not begin to dispel moral hazard because the markets know that governments will toss taxpayers’ money into the rescue pot rather than allow a systemically important bank to go under. The EU’s €55bn resolution fund, a modest step towards mutual sharing of risk, will be too little, too late when it becomes fully operational in eight years’ time.

A very clearly-argued paper (‘Where next for eurozone governance?’) from the Policy Network, a left-of-centre think-tank, lays out three different scenarios for the eurozone: beefing up present improvised arrangements designed to reassure the markets against risk of default; a downsized eurozone to make an “optimal currency area” with less economic divergence; and some form of fiscal federalism. The authors argue that the status quo is not sustainable because it is deepening the democratic deficit and may be unworkable. As a Union for both ins and outs of the euro governed by a confusing mix of treaties and intergovernmental agreements, the EU may have driven itself into a cul-de-sac. Its structures and policies may not be up to the challenges ahead, but its people do not want federalism. So is the future one step forward and several steps back?

John Wyles is an independent consultant based in Brussels

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