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Europe's best fix: A "New E.U."

May 30, 2012: 9:46 AM ET

It's time to press the reset button in Europe -- if members of the EU want a common currency, they should give up their national identities in favor of a European one.

By Cyrus Sanati

EU member states

FORTUNE -- There is growing fear that the European debt crisis may have given the euro an incurable disease that could not only bring down the common currency, but also lead to the total collapse of the European Union. Yet while Europe would certainly experience considerable pain if such a scenario were to occur, it may be just what the doctor ordered to solve Europe's current ills and inoculate it from future crises.

It is becoming increasingly clear that the political framework of the EU is preventing the continent from taking the necessary steps for it to solve this economic crisis. By pressing the reset button, Europe can learn from its past mistakes and could eventually create a far more stable and integrated union.

It has been nearly two-and-a-half years since the sovereign debt crisis moved over Europe like a heavy dark cloud. What had started out as simply a problem with Greece's ability to issue new debt slowly spread to Ireland, Portugal, Spain and Italy. Greece continues to be ground zero for the crisis where it has paid a high price for remaining loyal to the EU. Since the crisis began, the country has seen its economy contract by nearly 20%. The euro's strong value continues to make the country's exports and its tourism business uncompetitive while its public and personal debt load continues to be too big for its shrinking economy to ever handle.

The logical conclusion would be for Greece to simply leave the eurozone and default on all its debts, right? Sure, there would be a few years of intense economic chaos in the country during Grexit (a name the media has so cleverly ascribed to a Greek exit from the euro), but Greece will eventually get back on its feet. With a weaker currency, Greece would once again be able to compete for tourists with neighboring Turkey and Tunisia and also be able to export food stuffs and other unfinished goods to places outside the EU.

MORE: Greece: The anatomy of a default

Yet all major countries in the eurozone, including Germany and France, say they want Greece to stay in. The International Monetary Fund, which is helping the Greeks sort through its finances, is also in favor of Greece remaining in the euro. Even the far left Syriza party in Greece, which could take power in a coalition government in next month's parliamentary elections, supports Greece's membership in both the EU and the EMU. And most importantly, the Greek people, despite all the hardship they have endured, are still in favor of Greece staying in both the euro and the EU.

Given the widespread support for Greece remaining in the euro, one would think that a viable solution would have been found by now that would have put this crisis to bed ages ago. But the crisis continues to be as dangerous and disruptive as ever. That's because this is not about Greece and its tiny economy – it never has been. This is about the viability of the European Union as an effective political unit.

When the EU was first envisioned in 1952, it was to be solely an economic union to allow the free movement of goods and services throughout the continent. But in the past 60 years it has grown into a sort of quasi-political confederation where some EU laws now supersede national laws. The introduction of the euro in 1999 complicated matters -- the EU countries that chose to join the common currency were only willing to give up control of their monetary policy to the EU, but not their fiscal policy.

Instead, eurozone members promised to not run budget deficits that exceeded 3% of their GDP. This way, the governments would still be able to spend as they saw fit.  Unfortunately, without strong penalties, this rule was broken by nearly all the members of the euro at some point in the last decade, including Germany. Greece and the peripheral nations issued debt to fund grand projects and support and ever growing civil servant population. Germany and the northern nations used their economic advantages to flood the peripheral nations with their goods and services.

MORE: It's time for Europe to choose inflation over austerity

But this transfer of wealth from the periphery to the core of the eurozone broke down when Greece was unable to borrow enough money to keep the cycle going. Greece's economy had simply not evolved enough to the point where it could have both a strong currency and economic growth. It needed debt to fill in the gaps. This, to varying degrees, is basically the same scenario in all the other peripheral countries.

This imbalance will only continue to grow until the entire eurozone disintegrates. A Greek exit would destroy confidence in the common currency and lead to a number of bank failures across Europe. Other nations will be tossed out and what will remain will be a core Europe with a currency that is so strong that even German goods would be uncompetitive on the world markets. That group would collapse and the euro would be no more.

It is clear now why no one wants Greece to leave -- the core countries would lose their exporting advantage while the periphery would suffer a painful decline in living standards. The solution would be the pooling of debt and the creation of a fiscal union, but national governments - whether they be far left or far right – seem unwilling to give up enough power to make this solution viable.

Therein lays the biggest problem of the entire EU– its political structure. The EU is still governed by rules that were designed for a much smaller union without a common currency. Today, with 27 members, getting anything done in the EU is nearly impossible. While the Treaty of Lisbon, which goes into force in 2014, solves some of these problems, it still doesn't go far enough to allow member states to be able to prevent and respond to economic threats in a timely and decisive manner.

MORE: What a Greek exit means for the U.S.

So what's next for Europe? Europe may need the old EU to fall to make way for a more viable union – if that's what Europeans truly want. But the fall of the EU doesn't have to come about in a violent way; rather, it could be done in an orderly manner, similar to how the United States went from being a loosely knit confederation to a stronger federation in the 1790s. The calling of a conference to hammer out these details would need to be conferred but it should be understood that no one member will be able to hold the group hostage. If one member doesn't like the pooling of fiscal powers, it should be out of the new EU. If it doesn't want to be a member of the euro, it should also be out.

The time has come for the members of the EU to give up their national identities for one that is truly European if they want to continue having a common currency. Building new political structures and workable voting rights will ensure that not only can the euro be saved, but also that the dream of a strong united Europe as an economic force can finally become reality.

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