This may be remembered as the week Europe began to split apart. One woman could stop that

GERMANY’S chancellor, Angela Merkel, has the future of Europe in her hands. As the biggest creditor country, Germany holds the key to resolving the euro zone’s sovereign-debt crisis. As the continent’s economic giant, it is the biggest determinant of the European Union’s direction. And right now Europe may be embarking on a path that could tilt the union away from economic liberalism, risking a split and, ultimately, even a British exit.

Mrs Merkel seems to be sleepwalking into this danger. For all her sound instincts and skills as a politician, she appears to have no vision for the EU. She has been woefully slow to get to grips with the euro zone’s troubles, largely because German voters do not want to bail out weak countries such as Greece, Ireland and potentially Portugal. And, in her efforts to assure her countrymen that she is imposing Teutonic discipline on the profligate peripherals, she is allowing the euro zone’s role in forming the EU’s economic policies to be greatly enlarged.

Two meetings this week illustrate this worrying development. A summit of 27 EU heads of government will be followed by a euro-zone summit that omits ten of them (see Charlemagne). This might seem an arcane bit of Brussels procedure. Indeed, the British, normally the most suspicious of euro-integration, are pretending that it does not matter. But other “out” countries are up in arms. Historians may come to see this as the moment when the EU split into a dominant, corporatist euro area and a smaller, more liberal outer zone. Mrs Merkel is clever enough to realise this and dislike it, but she has not been brave enough to stop it.

Clubs within clubs

The fear that the single currency could divide Europe has a long history, going back at least to the 1992 Maastricht treaty: and Germany has played a crucial role in keeping Europe together. In the 1990s it adamantly opposed a French scheme for an “economic government” as a counterweight to the European Central Bank, for fear of compromising the ECB’s independence. Before the euro came into being in 1999 the then British chancellor, Gordon Brown, resisted the establishment of a “euro group” of finance ministers that excluded him. His French colleague, Dominique Strauss-Kahn, retorted that in a marriage one did not invite strangers into the bedroom.

Why would an overtly two-speed Europe matter? The British defend their passivity by pointing out that many EU policies and institutions only work by not including all members—the Schengen passport-free zone, defence co-operation, the planned EU patent. They add that the European Commission and the European Court of Justice will stop any euro-zone grouping fiddling with the single market: and if the “ins” try something, the “outs” still retain vetoes on things like tax and benefit rules. If the euro zone wants an economic government, David Cameron is saying, let it create one: it won’t affect us.

This is short-sighted. The history of the European project is replete with examples of policies set by a smaller group and later foisted on a broader one, from the common agricultural policy and the budget to the social chapter and the charter of fundamental rights. Other “out” countries, notably Sweden, Poland and Denmark, see this more clearly than Britain, and have reacted angrily to suggestions (originally opposed by Mrs Merkel) that euro-zone leaders should have more say over policy and meet more often (see article).

This is a matter not just of power but also of philosophy. The euro group of 17 is less liberal than the EU of 27. The distinction is not always clear-cut: the euro includes liberals like the Dutch, Irish and Finns, and the non-euro group has less liberal Hungary and Romania. But the centre of gravity of the euro zone lies at the less liberal end. The “pact for competitiveness” (now the “pact for the euro”) that Mrs Merkel and France’s Nicolas Sarkozy are promoting, for instance, includes the idea of harmonising corporate-tax bases, surely a step towards harmonised tax rates. Would a euro-zone economic government have heeded British objections to tougher hedge-fund regulation in 2010, or resisted Mr Sarkozy’s one-time proposal that EU regional aid should be cut off for countries indulging in “harmful tax competition”? Would it fight so hard to defend free movement of labour? Would it now promote a stronger directive to break down barriers to trade in services?

Experience shows that formal votes and veto rights in EU summits do not offer complete protection. The EU is a club, not a parliament. When proposals get to a summit, they have momentum: you can fight one or two, but not the whole lot.

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All this could present the “outs” with a hard choice. Some countries may hold their noses and try to join the euro in order to regain influence. But Britain would surely go the other way. Indeed, a less liberal euro-dominated club might even push the British into walking out altogether (see Bagehot). No doubt that would delight Eurosceptics; but if Britain then wanted any of the benefits of the single market, it would still have to observe most of the EU’s rules (as Norway does today).

Angela’s ashes

In her memoirs, Mrs Merkel might well say that Mr Cameron was to blame if it came to this. But she would have helped. In the past she resisted the idea of regular euro-zone summits precisely so as to ensure that the British, Poles and Swedes had seats at the table. By giving way now, she may soothe her voters’ current anxieties about the euro, but the future price could be large. If the euro zone moves to greater fiscal and economic-policy harmonisation, it may make the entire club less congenial to liberals—and less appealing even to those in Britain (including Mr Cameron) who want to stay in.

The European project has long had at its heart a tension between an economic liberalism that favours openness to the world and an economic nationalism that prefers a fortress. The Economist has always been on the first side of that argument; so, usually, has Mrs Merkel. As Europe’s most powerful politician, she should make clear that this week’s euro-only meeting is a one-off emergency summit rather than the start of something much more permanent—and more damaging.