Eurozone policy-makers often complain that they are not given enough credit for all the changes they have pushed through since the Greek sovereign debt crisis broke out. It is an understandable reaction. Since 2010, they have presided over a major overhaul of the eurozone’s governance framework. They have adopted a ‘Euro Plus Pact’, which commits countries to pushing through supply-side reforms; a ‘Six-Pack’, which strengthens the old Stability and Growth Pact and adds a new framework for monitoring economic imbalances; and a ‘Fiscal Stability Treaty’ (or ‘compact’), which requires member-states to implement balanced budget rules into their national law. In addition, they have created a bail-out fund (or firewall) to provide liquidity assistance to distressed sovereigns.

European leaders are right on one point: most of these changes would have seemed inconceivable only two years ago. More doubtful, however, is their claim that the changes represent a major step towards greater fiscal union. True, the new framework implies substantial new constraints on sovereignty (as several member-states have already found out). But in a more fundamental sense, the eurozone’s essential character remains unchanged. It is still what it was when it was originally launched: a currency which is embedded in a fiscally decentralised confederation, rather than a fully-fledged federation (such as the US). The thrust of all the reforms has been to reaffirm the eurozone as a rules-based currency union. The animating principle remains collective responsibility, rather than solidarity.

Consider what the eurozone still lacks compared with, say, the US. It has no federal budget for macroeconomic stabilisation: the EU budget is too small (at 1 per cent of GDP) and it cannot in any case go into deficit. Individual states are separately, not jointly, responsible for backstopping the banking system – unlike in the US. And the eurozone lacks a federal agency that issues government debt for the currency union as a whole. In other words, after all the repair work that has been carried out since 2010, the eurozone’s basic institutional configuration remains what it was before the crisis broke out. Because its member-states are reluctant to share the costs of a common currency, critical functions that are performed at the federal level in the US are undertaken at national level in the eurozone.

If the past two years have taught us anything, it is that the eurozone’s fiscally decentralised structure makes it a fundamentally unstable construct. One reason is that because the member-states do not monopolise the currency in which they issue their debt, the bond markets may treat the fiscally weaker among them as if they had issued it in a foreign currency. Another reason is that banks and states interact very differently in a fiscally decentralised currency union than they do in a federal one. Thus, in the US, the fiscal position of an individual state has no bearing on depositors’ confidence in a bank that is incorporated in that state; in the eurozone it does. Equally, banks in the US pose no direct threat to the solvency of the state in which they are incorporated; in the eurozone they do.

If one accepts that the eurozone is unstable because it is structurally flawed, what does this mean for its future? An optimistic case would go something like this. The US did not become a fiscally integrated monetary union overnight; we should not expect the eurozone to do so either. The elaborate system of rules on which Germany has insisted is necessary to establish a pan-European ‘stability culture’. Once that culture has been established, greater fiscal integration will be possible. In the meantime, embryonic federal institutions are slowly emerging. The eurozone’s bail-out fund could be viewed as a nascent debt agency. And the European Supervisory Authorities that were set up in 2011 could develop into a unified banking supervisory system with common fiscal resources to rescue and recapitalise banks.

A more pessimistic reading is that the focus on rules conceals deep-rooted opposition to the very prospect of fiscal union. One sign of this opposition is the European Central Bank’s emergence as the eurozone’s leading (but still largely covert) cross-border financier. Another sign is the IMF’s involvement in the bail-outs of Greece, Ireland and Portugal (it is unprecedented for the IMF to provide support to the sub-units of an entity that, like the eurozone, is running a current-account surplus). A third sign is the institutional sequence which the eurozone has followed: whereas in the US the federal assumption of state debts preceded the adoption of balanced budget rules by the states, in the eurozone balanced budget rules for the member-states have come first and the rest has yet to follow.

At best, then, the eurozone is in a state of institutional limbo. It has acquired some of the form, but little of the substance of a proper fiscal union. For the time being, the assumption (or hope) is that the eurozone will extricate itself from the crisis – and become a more stable arrangement over the long term – if it ‘Europeanises’ German discipline. Among creditor countries, the hope is not that collective discipline will make fiscal union (properly conceived) possible, but unnecessary. But they under-estimate the peculiar vulnerabilities to which the eurozone’s fiscally decentralised structure exposes its indebted members: not only are the latter particularly vulnerable to ‘sudden stops’ in private-sector capital flows, but they are also condemned to pursuing self-defeating economic policies.

In the end, it is the politics of the eurozone crisis that make its economics intractable – not the other way round. At root, the eurozone is in crisis because most voters still think of themselves as nationals first and Europeans second. The eurozone’s fiscally decentralised structure simply reflects the fact that solidarity is weaker across European borders than it is within them. The upshot is that EU leaders do not have a democratic mandate to complete the currency union. Their political commitment to the euro remains strong. They will do all they can to prevent the eurozone breaking apart, and will probably succeed. But it is harder to see how a European demos (and hence more stable currency zone) can emerge from the economic pain and mounting cross-border resentment that current policies are causing.

Philip Whyte [1] is a senior research fellow at the Centre for European Reform.