OPINION:Euro zone must show it has the political will to survive, writes WOLFGANG MÜNCHAU

JEAN-CLAUDE Juncker’s and Giulio Tremonti’s common European bond is the first constructive idea since the outbreak of the euro zone crisis a year ago. It is the first time that euro zone leaders have dared look beyond the current week’s headlines. If implemented in full, the proposal would end the crisis.

Why should this be? This is not a technical, but a political crisis. It is about whether, when faced with a large financial crisis, the euro zone has the political will to do whatever it takes: set up a mechanism of policy co-ordination, accept fiscal transfers and ultimately move towards a fiscal union. History has told us that monetary unions that refuse to become political unions are destined to fail. The euro zone has reached that point of destiny merely a decade after its launch.

Technically, a bond on its own would not resolve anything. Indeed one could construe pathological scenarios under which imbalances in the euro zone may increase under a common bond.

But the main significance of the proposal is political. A common bond would be regarded as the first step on a road towards a fiscal union. Such a fiscal union need not be large. We are talking about 1, 2 or a maximum of 5 per cent of the European Union’s gross domestic product. Nor need it happen the day after next.

Once it does, it would co-ordinate important aspects of tax and budget policies, financial policies, and even employment policies. Its job would be to ensure that the euro zone has a sufficient number of mechanisms at its disposal to deal with crises.

If you accept the proposal to cap the E-bonds at a level of 40 per cent of national GDP, this would, over time, create a bond market the size of the US treasury market. It would not only become impossible to speculate against individual member states, the bond would bind them together. The euro zone would also become a global economic superpower.

Is it going to happen? I am told that Germany’s opposition to the idea is as absolute as can be.

But if faced with a theoretical straight choice between a fiscal union or a break-up of the euro, Germany would probably accept the fiscal union.

A fiscal union is both a necessary and a sufficient condition for the long-term survival of the euro. If next week’s summit fails to move in that direction, the euro zone is in danger of running out of time. Smart investors might then start to place serious bets against the system. – Copyright The Financial Times Limited 2010