I’m on the other side of the world at the moment, with limited web/computer access (writing this on a combination of a mobile phone and a computer with a Japanese keyboard and operating system, so likely to be more typo-ridden and less coherent than I’d like), hence even less from me than usual. But this deserves to be noted:

“Europe is at a crossroads,” Merkel declared to the German parliament in Berlin today. “This is about no more and no less than the future of Europe and about Germany’s future in Europe.”

…In return for leading the rescue attempt, Germany is demanding new rules and penalties for the 16 countries taking part in the single currency.

The 16 could not keep muddling along turning a blind eye to the fudges and fiddling of fiscal miscreants, she argued. Instead, persistent breakers of the euro rules could be “suspended” from the single currency, fiscal sinners would have to forfeit their voting rights in EU councils, and would lose EU subsidies.

If there was no alternative, a country using the euro should be allowed to go insolvent, meaning hundreds of billions in losses for international banks and other creditors. This was seen as a warning to the markets betting on a country’s sovereign debt default, while confident that investors would recoup their money from European and German bailouts.

As a last resort, Wolfgang Schaeuble, the German finance minister, is proposing that a persistent rule-breaker be expelled from the eurozone, though not from the EU. Olli Rehn, the European commissioner for monetary affairs, is to unveil proposals next week for new rules that would give Brussels the power to scrutinise national budgets, withhold EU funds, and impose penalties in the eurozone.

The Germans support and oppose some of Rehn’s measures, but are against vesting the powers in the European Commission. Merkel’s proposals are radical and would require renegotiating the Lisbon Treaty defining how the EU works.

Many have argued that European monetary union was never going to work without far tighter centralised controls. They may now be about to be proved right.

For advocates of the euro (and I remain unconvinced one way or the other, seeing it as nice in theory but problematic in practice, as well as relatively convinced that it was a) introduced too soon, and b) too lax on entry criteria), this is a depressing time, with little space for optimism.

For advocates of the EU, it is almost as tricky to see anything positive here. Yes, this crisis may finally underscore something I’ve been saying for years – not all EU member states are equal, so it’s about time we stopped pretending that they are and start considering how to make a multi-tier EU function effectively. But after the decade-long squabbles that led to the final ratification of the Lisbon Treaty six months ago, I can’t see anyone in Europe being keen to start a fresh round of EU reform talks.

At the same time, we are likely to start to see some big shifts in the attitudes of two of the EU’s most important member states, Britain and Germany.

Britain, because of today’s general election, which may see the eurosceptic Conservative party gain power (and, more to the point, the strongly anti-EU William Hague become UK Foreign Secretary), with a number of explicit promises to scale back Britain’s already unenthusiastic involvement in EU affairs.

Germany, because of the understandable resentment from German taxpayers at having to bail out the rest of the EU combining with frustration at being the single biggest contributor to the EU project while at the same time having the smallest amount of influence (in proportion to both economic might and population).

Plus – an important point, this, as so much of Germany’s foreign policy over the last 60 years has been due to residual feelings of guilt and shame over World War 2 – we are entering the decade in which the last WWII veterans are going to start dying off. There is only so long that Europe’s largest economy was going to allow itself to be bossed around based on a geopolitical version of the sins of the father.

The decision of some parts of the Greek press to explicitly bring up the Nazi occupation of that country as a reason why Germany effectively owed them a bailout has only further underlined a feeling that has understandably been rising in Germany for some time now – “the Second World War had nothing to do with me – I wasn’t even born then, so why the hell should I be punished for what my grandparents’ generation did?”

To (only slightly) oversimplify, for the first 50 years of its existence, the EU has been shaped primarily by France and French intersts (note that it was a former French president, not a former German chancellor, who drew up the EU Constitutionh note that the Treaty of Rome contains many France-only clausesh note that France still receives a disproportionate amount of Common Agricultural Policy funds). Germany has tended to stand dutifully in the background, mostly nodding in (sometimes reluctant) agreement, due to a combination of war guilt and genuine enthusiasm for the ideas of European integration.

Germany has invested more in the EU – both financially and philosophically – than any other member state, yet has hed comparatively little say in how the project has evolved.

With the Greek crisis, this could all be about to change. Germany has long had a moral right to have a greater say in EU affairs – this may be the moment when she starts to assert that right.

I, for one, am hopeful that this could prove very positive indeed. Not in the short-term, perhaps – but in the medium-term this may, with any luck, see the EU reconstituted on more sensible grounds, where weak economies are no longer able to drag down the strong, and where rather than progressing at the pace of the weakest or most reluctant member state, those that are stronger or more enthusiastic for further integration can finally be allowed to truly flourish.

Update: The Centre for European Reform seems to be thinking on similar lines about the Germany-EU relationship… Key quote:

It is hard to see how the EU could make progress on anything – whether it is services market liberalisation or a common energy policy – with a reluctant, grumpy and inward-looking Germany at its heart.

It is time for some damage limitation.