If Spaniards are proud of and united around something, this is EU membership.

In Spain, national and European identities are so deeply embedded that they resemble the two sides of the same coin: you cannot think of one without the other. Gaining EU membership always meant leaving behind a traumatic century, besieged by the Civil War and the subsequent international isolation suffered under General Franco’s regime. So, the new democracy, born out of the 1978 Constitution, set itself the EU accession goal as the key element which would guarantee its stability and prosperity.

These goals have been fully achieved. Even under the current dramatic circumstances, with massive unemployment and a dire financial situation, Spaniards have never been freer, wealthier or safer. The 25 years gone since its accession to the EU are no doubt Spain’s best years in centuries. In the past, rather than a democratic deficit, they saw a “democratic surplus” in EU membership: for a whole generation, being member of the EU made Spain more, not less, democratic.

Still today, historical and emotional factors explain why is it that Spaniards have such a hard time in seeing any contradiction between their national and European interests. No doubt, however, that the current crisis has hit their self-esteem. Before the crisis, Spain could proudly claim to have developed a buoyant and open economy, with large multinationals present all over the world.

But after having caught up with its fellow EU members in terms of wealth and per capita income, now they perceive that their international image is severely damaged by the crisis and wonder whether the prosperity brought about by the euro was just a mirage. Worst of all, they resent the demeaning tone employed by those in other countries who like to portrait this crisis as the ultimate fight between a hard-working, protestant north and a lazy, catholic south.

Spaniards are however proud people and want to fight back. To do this, they are equipped with a set of solid arguments. First, they know how hard they have worked to turn Spain into a modern, wealthy and open country. True, they got generous transfers from the EU budget, but they used them wisely in projects which would add to its long-term prosperity.

Second, they have a track record proving that they are serious about reforms. Time and again, they have proven that they can adjust and reform. They did it back in the eighties in order the get in the EU, which meant a thorough industrial reconversion and the privatization and opening up of state monopolies to competition.

They also did it once in the EU, to achieve the goals marked by the internal market programme which was completed on January 1, 1993. Then, back in 1996, when the Conservatives gained power, Spaniards also embarked on major structural reforms and austerity cuts in order the get Spain into the euro. And throughout this financial crisis, as it was evident since the European Council meeting on May 9th, 2010, where EU leaders looked into the abyss, the successive governments, both Socialist and Conservative, have not hesitated to adopt severe austerity measures, cutting public salaries, extending retirement-age to 67, and making working conditions more flexible, as demanded by both Brussels and the economic operators.

Looking at how things evolved in neighbourly Greece, Portugal and Italy, Spaniards can proudly claim that their political system has worked well. It has not only not collapsed under the pressure of the crisis, but it has even been able to deliver a fresh and ample mandate to a new leader, Mariano Rajoy, to continue implementing the reforms which will allow Spaniards to gain the future. So far, owing to the courage and determination of its governments, Spain has both escaped economic intervention by the troika (the IMF, the European Commission and the ECB) and placing government in the hands of technocrats.

Third, Spain is about the best example of how the current crisis was brought about not by the fiscal profligacy of governments, but by the structural imbalances in trade balances and private lending created by 10 years of low interest rates. The fact that both Ireland, the most liberal and deregulated student in the class, and Greece, the most closed and statist member state faced the same destiny, says it all.

Back in 2007, the year before the crisis hit us, Spain had a budgetary surplus of 1.9% GDP and its debt/GDP ration stood at a negligible 35.7%. But while Spanish public finances were sound and in better shape than Germany’s, Spain’s private sector was overleveraged by a residential construction bubble and its trade deficit was the second in the world (10% GDP).

So, the paradox is, while from the outside Spain was growing, creating employment and enjoying healthy public finances, internally, it was losing competitiveness, piling up debt in the financial sector and heading for disaster. In 2008, after Lehman Brothers, Spain entered into a vicious circle: as the public sector financing dried up and threatened to collapse the economy, the public sector came into the rescue with a stimulus package which sent public deficit to 12%. However, this long hose failed to stop the crisis and the fire spread to the core of the economy, sending unemployment over 20% of the active population.

This is when Europe failed Spain. The same Europe which back in the seventies and eighties had rescued Spain from autocracy and mad it safe for democracy, now lacked the courage and resolution to step in and, recognizing that the crisis was not caused in the public sector and thus would not be resolved only by austerity measures but through a thorough change in the economic and monetary governance of the Eurozone involving, inter alia, a change in the role of the ECB to turn it into the lender of last resort.

Therefore, Spaniards confront this crisis with an ambivalent feeling:, they are well aware of the mistakes they made, but at the same time, they say how Europe constantly being behind the curve has helped to aggravate the crisis to the current extent.

It is because of these chain of inactions and shorsightedness that 2011 will be remembered as the year in which, for the first time in its history, the European Union looked into the abyss and wondered whether it would disappear.

Looking at how through the small crack opened in the Greek section of the euro vessel, the crisis spread from one country to another, bringing governments down here, forcing external intervention there and creating major economic difficulties across all the Eurozone, it is inevitable to wonder how on earth is it possible that European leaders allowed a small economy like the Greek one, which was, if anything, “too small to fail”, to threat to topple the entire European edifice, which indeed was and is “too big to fail”.

Back in the nineties, the politicians who launched the euro decided to ignore that it was an incomplete construction. However, looking at how the European project had evolved, bit after bit, always in a fragmented and partial way, they could more than happily live with these flaws. If needed, they believed, the euro will be repaired at sea at a later moment, and eventually completed, as it was the case with the single market or other EU policies, which had a rocky start too. After all, this is precisely how the founding fathers, Monnet et al, thought European integration would work: as an incremental and self-sustaining process in which each policy choice would require further integration at a later stage.

As we know, the euro sailed comfortably for a decade, providing growth, jobs, low inflation and cheap credit to the Europeans, even letting them believe that, as the Lisbon Agenda proclaimed, by 2020 they would own the most competitive and sustainable economy in the world. But, at the same time, it generated incredible imbalances among their members, especially when it came to trade deficits and private debts, which were not monitored by the so-called stability pact. Then, as predicted, when it was hit by an external asymmetric shock, in the form of the financial crisis that followed the collapse of Lehman Brothers, had a lot of problems to weather it because it lacked the adequate instruments to deal with it.

By this time, one fundamental change had taken place in Europe: the politicians who designed the eurozone were not there anymore, and their original motivations and inspirations had disappeared. Across Europe, and especially in Germany, there had been a generational replacement and a complete change of attitude towards Europe.

So, whether the European elites of the eighties and nineties, the Delors, Kohl, Mitterrand, Gonzalez, Lubbers, Amato etc., would have jumped on this crisis as an opportunity to complete the economic and monetary union with the fiscal, budgetary, monetary and institutional instruments which EMU lacked, the new leaders hesitated and rather went for the reactive and piecemeal approach which has placed Europe at such difficult time.

Before the crisis hit Europe, there were already inbuilt tensions running across Europe, especially among those which were weary and uncomfortable with the expansion of the EU from 15 to 27, which they no longer saw and manageable or able to speak and act with one voice in the world.

Despite having been an economic success, many members were besieged by an enlargement fatigue, and others, by a parallel “integration fatigue” or, even, “budgetary fatigue” because of decades of contributions to the EU budget. All this led them to replace their former instincts of automatically transferring further powers to Brussels as the remedy for every crisis to actually seek minimalist solutions which they could keep under maximum intergovernmental control.

All this explains how we got here, and also why is it so difficult to get out. The paradox is that, once again, as in the past, standard economics offers a very clear way out of the crisis. The textbook says that Europeans should appoint a finance minister, adopt common fiscal policies, set up a joint Treasury, raise its own taxes, substantially increase their common budget, issue Eurobonds, improve the quantity and quality of the institutions regulating and supervising both public expenditures and private finances and change the role of the European Central Bank. Should they fail to do so, leaders are being told, time and again, the euro would hardly survive.

But, once again, they are ignored and their advices dismissed as technically right but politically unachievable. Still, leaders insist on narrow and partial measures, like increasing the size of the EFSF every time its credibility is exhausted and spending considerable energy in drafting a new treaty setting in stone strengthened fiscal rules, when evidence show its not the wrong rules which cause the crisis, but the lack of adequate instruments to deal with it.

The problem is that as the crisis evolves, the one-sided insistence on austerity, and nothing else, will raise tensions among euro members, which in turn will make agreement more difficult. The crisis has already led to a resurgence of the worst national stereotypes between north and south, protestant and Catholics. It has also pitched new versus old members and between those who are members of the Eurozone and those who are outside. The delicate fraught position of the UK in the EU has also been shaken, threatening a withdrawal or a marginalisation of the UK from Europe from which nobody would benefit from.

Not to mention the waning of the Commission, the Council and the European Parliament. During the last two years, we have witnessed the replacement of the so-called “Community method”, which gives voice to all states and citizens alike, for the “Union method”, which spells a de factor directoire ran by Germany, the ECB and, occasionally, France. And, to make matters worse, internationally, the crisis has damaged Europe’s image, who proudly wants to be viewed as a respectable actor with a vested interested in a fully functioning and sustainable multilateral order, but is now increasingly being seen as spoiled and selfish actor which asks less wealthy economies to come to its rescue and captures international institutions, like the IMF, to serve itself.

The resulting EU is rather ungovernable, dominated by bitter discussions about austerity and stimulus rather by a sense of common purpose. Where some cry Germanization others claim free-riding by the Southern partners has gone too far. And in that mood, it is utterly impossible to move the Union forward. Germany’s economic model is no doubt a success, and this provides Berlin the legitimacy to show the way out of the crisis.

However, a big deal is needed, one which recomposes the tensions and satisfies the legitimate concerns and needs of all parties, which are many and complex but not insurmountable. This “big deal”, including sweeping changes in the economic governance of the Eurozone, not just the current proposals which just aim at introducing new austerity-policing mechanism, will happen, that is for sure, but at greater cost and later on the road. The Kassandras will be proven wrong. But the deal is still far away. As Churchill used to say about the Americans: “they only do the right thing after having exhausted all the other possibilities”.