Southern Europe's way out of crisis may require ceding sovereignty to Brussels

I recently called a Spanish friend who has toyed with the idea of entering politics. If he ever wanted to do so, I told him, now was the time.

There are two issues that will move to the centre of the political debate within a few years, and if he were to stake out radical positions now, his prestige and visibility would soar.

First is Germany's role in the crisis. Over the next few years there will be a crescendo of blame directed at Germany as having caused the European crisis. Critics will point out that European monetary policy, which is often seen as driven primarily by Germany, was incompatible with policies that effectively suppressed German consumption and made a southern European debt crisis almost inevitable.

German domestic policies created large structural trade surpluses, and monetary integration forced the rest of Europe to choose between high unemployment on one hand and asset bubbles and rapidly rising debt-fuelled consumption on the other. For better or for worse, Europe chose the latter (with the active help of the European Central Bank), and is now paying the price, just as Germany is wagging a finger at the shameless profligacy of the southerners.

Second is Spain's future within the monetary union. American economist Barry Eichengreen once argued that the democratic enfranchisement of workers made a return to the gold standard impossible because workers, who had traditionally borne most of the burden of gold standard adjustment through rising unemployment, would no longer passively accept those policies.

Spain is in just such a position. Although most Spanish politicians continue to insist Spain's joining the euro is irreversible and a symbol of its modernity, the fact is that in order to adjust, Spain is going to have to tolerate unemployment of 20 per cent or more for several years, and Spanish voters, correctly in my opinion, will not tolerate such an outcome.

The argument will be made by establishment politicians that to reject the euro will be seen as an indication of contemptible irresponsibility and will condemn Spain to developing-country status. This was the same argument made against France in the early 1920s, when it was forced into a humiliating devaluation of the franc. Other European countries poured scorn on the irresponsible French and predicted economic disaster.