The European Union was almost first and foremost a political project. And it was certainly one that required vision and daring. To bring together countries that are so different in size, culture, language and often even aspiration, and historically have been at war with each other, and to persuade them to give up quite a lot of policy autonomy to a European federation, was no small achievement. The subsequent expansion of the Union was also brave, as several formerly socialist countries of central and eastern Europe were admitted despite a relatively recent history of extreme antagonism.

But the economic union was even bolder in design and more far-reaching in it consequences. It was also a prolonged and tortuous process, but there is no doubt that this is the most ambitious project of economic unification without complete political union, that has ever been attempted anywhere in the world. The process that had its origins in the greater economic interdependence of the past-war period (that was perversely encouraged by Marshall Plan aid from the US) and then proceeded through is hesitant steps in the treaty of Rome in the 1960s, through to the customs union, the Maastricht treaty that set the schedule for the Single Market, reached its the culmination in the creation of the eurozone, which contains only a subset of all the countries in the EU.

That remarkable process may now be unravelling. Whether it does actually do so depends critically not only on the vision and commitment of the leaders, especially of the largest countries, but also the predisposition of the people in different countries, and this too cannot any more be taken for granted.

The future of the currency union, and in particular whether it remains the relatively broad-based union that it is today or turns into a much smaller union of a set of economies who see themselves as "stronger", will depend critically on Germany. Its Chancellor Angela Merkel was widely criticised in other eurozone countries for her tardy, hesitant and relatively stingy response to the crisis in Greece, which probably fuelled the speculative attacks against Greek government bonds that have probably intensified the crisis.

Finally, when it became clear that inaction would only add to the problems with each passing day, she and other European leaders delivered what many had argued to be the minimum required from the first signs of the crisis: a clear statement of commitment to financial markets by underwriting Greek debt and providing significant amounts of emergency finance. Greece is to be provided with 80 billion euros of debt from the EU over two years, at somewhat (but not very much) lower interest rates than the market is currently demanding, to add to the 30 billion euros to be provided by the IMF. A total of 450 billion euros has been pledged to help other eurozone economies that may face difficulties, though this is still only a potential credit line.

It is not clear that this will really provide anything more than a temporary palliative, since the underlying economic contradictions that have cause the problem have not really gone away. Essentially the funds provided will only help Greece to meet its debt servicing requirements) and therefore help to indirectly bail out French and German banks).

In return for this "relief" which is expected to reduce the battering Greek bonds are facing in markets, the government is being asked to impose an austerity programme that is staggering in its sweeping intensity. It requires massive cuts in wages, pensions and employment, and will have very large negative multiplier effects on the small family-run businesses that constitute the backbone of the Greek economy. Nor is the painful medicine to cause a quick recovery: the economy is anticipated to decline for several years (in some projections, until 2017!) with no hope of anything getting better, until markets deem that the right balances have been achieved once again.

Obviously, there is widespread resistance to this, and the austerity programme in Greece may yet collapse because of popular resistance and lack of legitimacy. Meanwhile, the other countries in potential or actual difficulty, such as Spain, Ireland, Portugal and Italy, have received a temporary reprieve but this may not be sustained either. As long as membership of the eurozone prevents nominal devaluation in these countries, the deflation they will be forced to impose on their citizens will be so harsh that it may not be politically acceptable, even with some protection in the form of funds that help them to continue to service their debts.

But the other side of the coin is that Germany, which must remain the paymaster for the Union if any of this is to be sustained over the medium term, may be unwilling to deliver for too long. Angela Merkel's unwillingness to get involved was not simply a personal choice: it reflected the deep unpopularity of such a bailout with the German public. In fact, her government was punished for the decision to assist in the recent bailout with a comprehensive defeat for her party in the regional election in North Rhine-Westphalia, which has deprived the ruling coalition of a majority in the upper house of Germany's parliament.

The current inwardness of Germany' electorate reflects the uncertain economic conditions as well as the nature of Germany's own recent growth. Germany has remained a powerful exporter through the previous global boom and survived the global crisis largely by ensuring that rapid productivity increases were not accompanied by real wage increases. This was made possible by the large pool of educated surplus labour of East Germany. But it does mean that workers have not benefited from the boom even as they are now threatened by the crisis. This has made the people of Germany much less willing to support the larger project of the European Union with German public funds.

Political change in another part of Europe also augurs ill for the project of European integration. In the United Kingdom, the recent "Mick Jagger election" (''can't get no satisfaction” for anyone) yielded a result that has created an unlikely and potentially uncertain coalition between the Conservatives and the Liberal Democrats, who differ hugely on most policy matters of significance.

The election result in Britain can be interpreted most broadly as a general disaffection with the electorate's own state of being and with politics in general, expressed not so much as a vote for positive change but a declaration against everyone. This seems to be in keeping with the public mood in Britain at present, which is characterised by an almost palpable sense of gloom; a general feeling joylessness; a perception that the country is in decline and perhaps on the verge of crisis; a sour, almost brittle resentment at other nations and nationalities that at least superficially appear to have better prospects.

Much of this can be related to economic pressures. The UK appeared to have come out of the global financial crisis relatively quickly compared to other developed economies. In fact, the relatively quick response of the Brown government in terms of massive monetary easing and increased fiscal spending did cushion the economy from the worst effects of the crisis and allow for a relatively quick emergence from recession.

The UK economy has many macroeconomic features that are quite similar to the countries in the eurozone that are now seen to be in trouble: large current account deficits; large fiscal deficits that are adding to the already large ratio of public debt to GDP; large private debt to GDP ratios largely driven by the earlier housing boom; poor employment generation in the recovery phase reducing the increases in effective demand that would generate sustained recovery.

The big difference with these other countries, of course, is that Britain did not join the eurozone and therefore is able to use the exchange rate as a macroeconomic tool for adjustment. The pound sterling has indeed depreciated over the past year, by around 25 per cent in trade weighted terms. This has allowed Britain to avoid the more deflationary forms of adjustment that would have otherwise probably been imposed on it by the bond markets. The economy is supposed to be growing at 1.5 per cent this year, while growth next year is largely expected to be driven by exports, reflecting the exchange rate change. This lesson would not be entirely lost on other countries in the eurozone.

However, such a recovery would also be affected by the major public spending cuts that the new government in the UK has already promised. In addition, the Conservative Party, which is the dominant party in the ruling coalition, has a long and sometimes fierce tradition of euro-skepticism. It is unlikely to be enthusiastic about any moves to deepen integration in Europe or be involved in bailouts of other countries. It has already extracted a promise from its partner in the collation (the Liberal Democrat Party) that there will be no attempt to join the eurozone during the life of this Parliament.

The currency union between such disparate partners may have been a flawed project from the start, especially as it did not incorporate a real commitment to fiscal federalism. But it would be a pity if the difficulties of that project also affected the more noble and attractive aspects of European integration, which emphasised pluralism and co-operation in ways that other regional grouping could try to emulate.

May 21 , 2010.