Why debt crisis could lead to a United States of Europe

At the start of a new week it seems that the markets have come to the conclusion that ditching Berlusconi as leader of Italy isn't going to be the panacea to Europe's sovereign debt crisis that some thought it would be.

Of course it's absurd that the changing of the guard in Athens and Rome would cause a fundamental shift in the situation. These countries may be the founding fathers of democracy and the civilized world; but as they currently stand both Rome and Athens have no democratically-elected heads of state and are reliant on a bunch of technocrats to push through tough austerity and economic reforms to ensure that countries avoid default and that they remain in the euro.

But while unelected governments with a mandate to push through the largest spending cuts for generations comes with its own problems, the markets still seem fairly placated by the prospect of a change of leadership in Europe's two most troubled economies.

This is incredibly significant for the future of the currency bloc. A lot of debate has gone on about the fact that markets have demanded political change in the currency bloc, thus sovereign nations are once again held hostage by market forces that are invariably a force for evil — as portrayed by some sectors of the media, anyway. However, this is the wrong assumption in my view. The markets have no real power to change governments and the prospect of political change has only really impacted the bond market, the euro, for example, has been remarkably unaffected by what is going on in Rome.

The bond market in particular is reacting to Italy and Greece's loss of sovereignty and the peoples' choice to choose their own governments, not because the markets are some sort of fascist force, but because they believe the United States of Europe (as has been touted by some of the world's top economists) is the only way to solve the crisis.

The US, for all of its problems, is considered to be a functioning political entity hence last week, as Italy was in the depths of its own sovereign crisis, Jefferson County in the state of Alabama filed for the largest municipal bankruptcy in the history of the United States with more than $3billion debts.

Jefferson County only has 600,000 residents but ran up massive debts in the last decade after a huge sewerage overhaul system was plagued by over-runs and corruption — not that different from stories out of Greece. However, although this is a large amount of money and threatens the stability of the $3 trillion municipal bond market that helps US states and municipalities finance their spending programmes, because Alabama is ultimately protected by the Federal government, which has its own Treasury and Central Bank to print money, the markets didn't bat an eyelid.

Thus, no one is genuinely concerned that the residents of the state of Alabama have a President who was a one-time Senator of Chicago and has very little association with their state. This is because it is accepted that Alabama is better off being part of a large fiscal and political union than being out on its own.

This is why the best economic heads in the land all converge around the same solution to the debt crisis- fiscal and political union and the ECB as a last resort lender. So if the Eurozone is to stay together the future holds two things: firstly the United States of Europe and secondly, inflation as the ECB tries to monetise the currency bloc's debt.

Even German Chancellor Angela Merkel hinted that this was her ultimate goal during a speech at her annual party conference earlier this week. Firstly she wants closer fiscal union, which will then lead to a deeper political union.

So what would the United States of Europe look like? The first question to ask would be who would be included. This would most likely be all current Eurozone members absent any rogue peripheral states that don't sign up for harsh fiscal austerity in return for continued financial assistance.

At the moment it seems like each member state is willing to toe the (German) line and any that don't will get the cold shoulder as Greece found out after ex-Prime Minister Papandreou announced a referendum on whether or not to accept the latest round of EU bailout terms.

The United States of America had its teething problems at the start, including a civil war some 60 years after the signing of the Constitution. So while Europe's leaders seem to be coming to the conclusion that more not less Europe is the solution to this crisis, the road ahead will be littered with obstacles and the markets are right to be cautious at this stage.