This may occur in two ways: Either the EU disintegrates completely, or it mutates into something unrecognizable to its original purpose.
This commentary concentrates on some of the factors causing the disintegration.
The functioning of the EU has, until recently, been built on two political pillars that now appear to be crumbling: Primarily, German growth has made possible the joint financing (through low-cost debt, the EU budget, and the central banks' clearing system) of unsuccessful economies without the EU forcing them to commit to politically unacceptable reforms. Beneficent global developments have made possible the concentration on economic integration while going slow on the much more contentious integration of cultural, social, and foreign policies.
The deterioration of the global economy, together with EU policies, now threatens industry and living standards in EU member states, reduces the scope of joint economic support, and forces member states to rapidly evaluate their readiness for possibly radical reductions in their political self-determination. This is most evident in Italy.
The yields of Italian sovereign debt have reached levels that can be considered unsustainable, given the country's high indebtedness and low rate of economic growth. For example, the yield of the Italian 10-year bond breached the 4 percent line late this past week.
Contentious Issues Piling UpBoth Hungary and the Czech Republic have objected to the plans for a price cap of Russian gas, which now looks unlikely to be enforced. The European Commission also is planning to cut funding for the Hungarian government of Viktor Orban due to “rule-of-law concerns.” This is unlikely to increase the incentives for Hungary to stay in the union.
More generally, as funding is made conditional for countries meeting the test of adhering to “European values,” one can expect the list of such essentially political requirements to grow as economic conditions worsen and demands for uniform policies grow.
For example, Poland is fed up with constant extra demands from the EU, such as the demand to walk back from the changes the Polish government was planning to the judicial system, considering the distribution of funds from the recovery fund to its government.
Since a number of contentious decisions still require unanimity, such a threat might be unwise to take lightly.
Fault lines are also emerging regarding the Russia sanctions.
Practically, this means that President Vladimir Putin has the ability to push Italy into a deep recession and create yet another economic basket case in the EU. This time, Germany may not be able to guarantee the financing needed for saving Italian companies and the nation's banks. If so, yet another debt crisis may well come ablaze in the eurozone.
The question is, will the new government of Italy just sit and wait for this, or will it, perhaps, insist that the EU or the country itself negotiate a deal with Russia?
So, how will the EU respond to these threats?
We're assuming that the European Commission is, at some point, encouraged to propose a recovery fund 2.0, which would need to be considerably larger than the previous one (around 800 billion euros). The fund would provide financing for countries to cope with rising energy prices as well as to help the bond markets of Italy and others to retain market confidence.
The ECB may even be forced to restart quantitative easing while it raises rates. Indeed, this may already be happening, as the balance sheet of the ECB has grown by some 13 billion euros since mid-August.
The question remains: Will all the member states "play ball" in this and coming issues? We aren't so sure.