Four days ago, French President François Hollande declared his in-principle commitment to the creation of a “euro government, with the addition of a specific budget and a parliament to ensure democratic control.”

This is more an opening gambit in a debate about the terms of putative federalization (a term Hollande was careful to avoid), than a statement of French commitment to it at all costs. 

If some form of federalization comes about, it will not be because the French especially desire it, but because the logic of the Euro ultimately demands it.

There has been talk of political and fiscal union since the Euro crisis erupted five years ago. It was one of two options for resolving the Euro crisis that the German Government seriously considered, before ultimately rejecting it in favor of the inter-state negotiations that produced the treaties creating the European Fiscal Compact and the Single Supervisory Mechanism, or banking union.

But the Greek debacle has demonstrated the limits of the inter-governmental approach. In the final resort, enforcing Eurozone rules requires a form of political control over member-states.

Germany is also in a better position to dictate the kind of federalism the Eurozone might adopt. Though German taxpayers have become more exposed to other Eurozone members' debts, Berlin has put that money to good effect, using it to extend its reach over afflicted countries' fiscal affairs. 

In Hollande's formula, the emphasis lies on 'democratic control' of the 'common budget'. For Germany, however, the aim would not be to create a European 'demos', but to gain control of (wayward) members fiscal policies.

Thus, German Finance Minister Wolfgang Schäuble – Germany's most popular politician – called a year ago for “a European budget commissioner with powers to reject national budgets if they do not correspond to the rules … jointly agreed” and “a 'Eurozone parliament' comprising the MEPs of Eurozone countries to strengthen the democratic legitimacy of decisions affecting the single currency bloc.”

For Berlin, then, the ideal form of European political and fiscal union would offer indirect, but reliable, control over the fiscal policies of other Eurozone members to ensure their 'competitiveness' and the euro's long-term stability, but the retention of national control over those issues that underpin Germany's position as Europe's paramount power. 

Perhaps the jurisdiction of a Eurozone parliament could be limited to questions pertaining to the shared treasury (unless, say, a bill gained a super-majority of votes). 

To make it an instrument for policies hatched in Berlin, Germany could write the rules of the 2012 Fiscal Compact into any potential Eurozone constitution that established the parliament: mandated balanced budgets, the elimination of structural deficits, maximum debt-to-GDP ceilings, etc. The same constitution could also empower a federal finance ministry to rewrite national budgets that fell short. 

In return, a common Eurozone treasury, financed by indirect taxes – a classic compromise for nascent federations (for example, the 19th century U.S., the German Empire after 1871, and the Australian Commonwealth before 1942) – could issue common Euro bonds to mutualize a portion of member-states' debts.

With direct taxes still collected by national governments, and with Germany remaining the biggest of those, ultimate financial firepower would remain in the hands of the Bundestag, meaning the German chancellor would remain Europe's de facto leader for long as Germany remained Europe's strongest economy. 

For the same reason, the independent European Central Bank would also be beyond the control of the Eurozone parliament, but not much less heedful of the German chancellor than today.

This might sound like an odd form of federalism (and such a Eurozone would still be more a con-federal than fully federal state). 

But Prussia's leading role within the post-1871 German Empire – an 'emphatically devolved' 'confederation of sovereign principalities' that left the sovereignty, parliaments, armies and diplomatic corps of the smaller German kingdoms and duchies intact – offers a historical model. (Since the foundation of Imperial Germany's power was the Prussian army, Chancellor Otto von Bismarck was often more powerful as chancellor of Prussia than of Germany.)

The trick would be in getting the rest of the Eurozone to agree to it.

Here, Chancellor Merkel could again take a leaf out of Bismarck's book. Indeed, perhaps she already has. 

19th century Germany and federalism

In 1859, Germany was a collection of some 39 sovereign states, loosely gathered in a 'German Confederation' (like the EU, a customs union but not a state). Helped by an economic boom from 1850, Bismarck united them by demonstrating the indispensability of Prussian leadership of a nascent but disunited German nation in Europe that had never before existed as a political entity. 

In the Danish War (1864), the Austrian War (1866) and the Franco-Prussian War (1870), Bismarck ensured that each crisis drew the minor German states into closer political and economic dependence on Prussia, until in 1871 a federal German Empire with Prussia as its largest state was at last proclaimed. 

By design or default Germany has followed a similar path today, using its economy – the world's fourth largest – rather than its army. 

Germany represents somewhat less than 25% of the population of the Eurozone and about one third of its economic output, making it less hegemonic than Prussia was in Imperial Germany (62% of the population). 

But it has the support of a larger block of friendly states tied more or less economically to it: the Netherlands, Austria, Belgium, Slovakia, Lithuania, Latvia, Estonia and Finland. And as the German economy has stood firm while other big countries (France, Spain and Italy) have wilted, the 2010-15 European sovereign debt crisis has amplified Germany's political influence disproportionately. 

Indeed, when Paris emerged as Greece's defender in Brussels 10 days ago, it was partly replaying Vienna's (ultimately doomed) attempt to thwart Prussian dominance over the minor German states in the 1860s. What France was really defending was not Greek sovereignty, but its own. 

Perhaps all that stands between Germany and a Eurozone federalized on German terms is a French debt crisis – and Paris hasn't balanced a budget since the 1970s.

Nationalism, the missing ingredient

But no iron law says a federal, or more federalized, Europe must come into being. By comparison with the 19th century, the essential ingredient of nationalism is missing. 

Yet, while anti-EU sentiment has grown, what has been remarkable during the crisis are the sacrifices that European peoples have been prepared to endure in the name of the common currency. 

Greeks (so, at least, it seems for now) preferred capitulation to being cast out of the euro, partly suggesting their hard-won identity as modern 'Europeans' was dearer to them.

A majority of Germans might believe the latest bailout 'bad' or 'very bad' for Germany. But if the government will not fall over it, it's partly because Germans have learned to see their future as bound up, for better or for worse, with Europe's. The only long-term alternative to federalization, Germany's departure from the euro, attracts little support.

Of course, learning to live in a federal Europe won't be easy for anyone. Though it would now be cloaked in the greater legitimacy of federal structures, southerners would still resent the intrusions of federal supervisors and agents. 

But they would at least feel that northern Europe finally stood behind them, come what might economically in the 21st century. Europe's 'new normal' – a chronic squabble over the redistribution of fiscal revenues that a federal state could affect without so much controversy – would be over. 

And it would be difficult, not least, for Germany. The creation of the German Empire made German, and its Prussian core, one of the world's great powers.

But as Australian historian Christopher Clark writes in his award-winning Iron Kingdom: The rise and downfall of Prussia, 1600-1947, Prussia “had to learn to inhabit the large and ponderous body of the new Germany.” He continues that, “Perhaps the most striking thing about the new political order was the weakness of the central authority.” 

In the long run, even Germany might find such a federal Europe frustratingly limiting. Like every federal venture before it in history, Europe's would doubtless grow more adventurous with time. 

This piece first appeared in the Lowy Interpreter here.