Will the financial crisis break the Eurozone or make the superstate?

Today, the European Central Bank head Jean-Claude Trichet announced that Eurozone interest rates would remain at 4.25 percent. Inflation remains the bank's priority, he added, despite pressure from states including Spain, Italy and his own France for a cut.

It has become something of a truism among commentators that the current financial crisis is an American, or even Anglo-Saxon one. Indeed, the BBC website ran a column on how the French weren't doing too badly during the credit crunch, while German finance minister Peer Steinbrück last week argued that the "American problem" would cost the US its superpower status. Nothing for Europeans to worry about.

Doubtless, remarks like these have contributed to the hundreds of anti-US comments appearing on internet bulletin boards. The crisis is America's making, and while some European economies may suffer a slight downturn, when all of this is over the US should and will remodel itself on the Eurozone template.

It's not a theory that stands up to much scrutiny.

As Ambrose Evans-Pritchard explains, days after Mr Steinbrück's claims, he was orchestrating "Germany's biggest bank bail-out, putting together a €35 billion loan package to save Hypo Real Estate. By then Europe was "staring into the abyss," he admitted. Belgium faced worse. It had to nationalise Fortis (with Dutch help), a 300-year-old bastion of Flemish finance, followed a day later by a bail-out for Dexia (with French help).

"Within hours they were all trumped by Dublin. The Irish government issued a blanket guarantee of the deposits and debts of its six largest lenders in the most radical bank bail-out since the Scandinavian rescues in the early 1990s. Then France upped the ante with a €300 billion pan-European lifeboat for the banks. The drama has exposed Europe's dark secret for all to see. EU banks took on even more debt leverage than their US counterparts, despite the tirades against ''le capitalisme sauvage'' of the Anglo-Saxons...

"It turns out that European regulators have allowed even greater use of "off-books" chicanery than the Americans. Mr Paulson may have saved Europe."

The Europeans are finding it difficult to agree on much. The Irish guarantee of bank deposits was condemned by Brussels and London (the British fear it will cause UK savers to transfer their accounts to Ireland).

Of the French bailout plan, it is reported that Nicolas Sarkozy has called meetings with EU leaders to work on a package of measures to create a "Europe-wide emergency fund" to bail out banks when governments are unable to intervene. José Manuel Barroso, president of the European commission, and the single-market commissioner Charlie McCreevy are said to be in agreement with the need for closer scrutiny and intensified regulation. However, the British aren't keen on Sarkozy's 300bn fund and the Germans have explicitly ruled out a "blank cheque" for banks, “regardless of whether they behave in a responsible manner or not."

As for the single currency, the Euro is coming under greatly increased strain. Evans-Pritchard believes that the Central Bank's decision to raise interest rates by a quarter of a percent in July, despite cries from France and Spain that their economies would be unable to cope, "may go down as the greatest monetary error of the post-war era."

Germans might enjoy the bracing winds of high interest amid global chaos, but the "one -size fits all" model simply doesn't work. It is not Eurosceptic cynicism to say that it wasn't meant to: the Euro was supposed to force political union, and as Evans-Pritchard reminds his readers, the founders hoped for a "beneficial crisis" which would make political union a necessity. Cometh the hour, cometh the superstate.

There's evidence that this moment is being seized for that very purpose. Dan Hannan reports that Brussels is calling for more integration as a solution; An overwhelming majority of MEPs voted for common rules on private equity and hedge funds.

"Let's remember that Brussels has been trying to harmonise financial regulation for decades. Federalists have always resented the success of the City of London, which they attribute to unregulated Anglo-Saxon "casino capitalism". Suddenly, they see their opportunity," he wrote last week.

In another article, he added,

"I'm reminded of the atmosphere that prevailed in Brussels after 9/11. The integrationists presented a series of proposals to harmonise justice and home affairs that had been kicking around for years. Until then, they had never had a majority. But the moment their proposals were repackaged as 'anti-terror measures', no one wanted to be seen opposing them."

Commissioner McCreevy admits that it would be "devilishly difficult" to secure agreement among the EU's 27 states. His workaround is worrying: "He is proposing a "college" of supervisors that would be headed by the regulator in the bank's home country, who would be empowered to "break the Gordian knot" in the event of disagreements," reports the Guardian.

Doesn't sound like a recipe for democratic change to us, more like emergency powers. The EU's response to the rejection of the Lisbon Treaty and the Constitutional Treaty has been to "sacrifice democracy in the name of efficiency" as the FT's Gideon Rachman memorably put it.

We could be facing a revolution, or more likely, a bloodless coup. News, market rumours and trades now occur almost instantaneously. A bank or even a small nation could go bust before ministers and regulators arrive for such a meeting; who knows what could happen as the EU's usual wrangling and trade-offs are taking place over their usual 48 hours or so?

EURSOC wrote in June that "We become citizens of Europe through time and trauma, whether via trade or conflict" - we can't be the only observers wondering if the economic dread will force emergency powers for the EU, and wondering if once granted, they will ever be revoked.

Or, indeed, we could be looking at the break-up of the Eurozone. Evans-Pritchard again:

"The storyline is evolving much as eurosceptics predicted, yet the final chapter could end either way as the recriminations fly. Germany has already shot down the French idea. The nationalists are digging in their heels in Berlin and Madrid. We are fast approaching the moment when events decide whether Europe will bind together to save monetary union, or fracture into angry camps. Will the Teutons bail out Club Med? If not, check those serial numbers on your euro notes for the country of issue. It may start to matter."

While some forecast collapse, others spy omens. In the midst of a deeply strange article in the Telegraph, Mary Riddell makes the frankly surreal claim that "Gordon Brown is actively considering whether Britain should join the euro."

Could there be a worse time to throw your lot in with the single currency? It is an open secret that the UK's interest rates are shadowing the Eurozone, but to plunge in now as it risks destruction would be madness.

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