Simon Nixon 

Perhaps the European Union's problem is too much democracy rather than too little.

Until last week, few outside Belgium even knew of the existence of Wallonia, let alone that this region with a population of 3.5 million had a parliament with the power to block trade deals backed by the rest of the EU, with a combined population of 500 million.

Now Wallonia's objections may have killed the EU's Comprehensive Economic and Trade Agreement with Canada, which was supposed to be ratified by all 28 EU leaders and Canadian Prime Minister Justin Trudeau this week.

The EU is giving Belgium until Monday evening to decide whether it will agree to sign the deal, Belgian and EU officials said.

Even if Wallonia can be persuaded to change its mind, CETA's future isn't assured. The deal can only be provisionally applied. The most contentious aspect of the deal -- the creation of independent dispute arbitration tribunals which will allow investors to sue governments if they believe national rules have been set that breach the terms of the agreement -- must still be ratified by each of the EU's 37 national parliaments and assemblies.

There is strong opposition to CETA in several countries including Germany, Austria and France. What happens if it is later rejected by a national parliament isn't clear say EU officials: there is no precedent.

The real harm from CETA's potential failure lies not so much in the loss of a much-needed but largely speculative economic boost but in the damage to the self-confidence of the EU itself, not least in its own leadership.

Over the past 18 months, as it has struggled to manage a series of crises ranging from the Greek debt crisis to the migration crisis to the trauma of the Brexit referendum, the draining of confidence in the EU's long-term future has been palpable.

The EU measures its self-worth by its ability to find common solutions to common problems. Yet it now finds that not only are many of the EU's problems of its own making -- reflecting past decisions to create the euro and abolish internal borders without putting in place the structures to withstand shocks -- but that the task of finding common solutions has become far harder.

It was never easy to get 28 governments to agree, but once they had struck a deal, they could usually be relied upon to secure parliamentary approval. But as is clear from the CETA debacle and the growing opposition to eurozone bailouts, this is no longer the case as insurgent parties of left and right pull the ground from under mainstream pro-European parties.

Now some policy makers wonder whether the EU could find an effective political response to any future shock. This is worrying given the multiple risks to the EU outlook.

The EU last week dodged a bullet when the rating agency DBRS maintained Portugal's investment grade rating: a downgrade would have left Portuguese government bonds ineligible for purchase by the European Central Bank, in all likelihood necessitating a new bailout. But a new Portuguese bailout may still be necessary unless Lisbon can soon persuade the private sector to provide much-needed capital to its banking system.

Nor is there any sign of a breakthrough in the long-running standoff between Germany and the International Monetary Fund over the timing and quantity of debt relief for Greece, raising the specter of a new Greek debt crisis when it inevitably runs out of money again next year.

Meanwhile, Italy tops the list of many EU policy makers' worries: Rome recently dared the European Commission to reject its new rule-breaking budget just ahead of a referendum which could trigger the fall of Prime Minister Matteo Renzi's government and reignite doubts over the country's financial stability.

Indeed, some European officials privately fear that the eurozone is just one shock away from disaster -- a disaster that has so far only been averted by the ECB's bond-buying program, which has eased the fiscal pressure on eurozone governments, allowing them to borrow and spend their way to a modest recovery.

Yet the ECB's money printing operation is already running into serious political constraints as it looks for ways to overcome a scarcity of bonds eligible for it to buy under its current self-imposed rules. It has given itself until December to decide whether to start buying bank debt, or buy government debt at prices that guarantee it will face losses, or switch the focus of its bond-buying away from Germany toward less creditworthy countries such as Italy. Whichever it chooses risks a political backlash.

How can the EU respond to this worsening political climate and persuade its citizens of the benefits of seeking common solutions to common problems?

The one area where the Commission believed it could make a difference was trade, over which the EU in theory has exclusive power to act on behalf of member states.

Yet now the EU's member states have effectively taken back control of trade policy too. Mr. Trudeau recently asked what the point of the EU is if it can't do a trade deal with Canada. It is a question that in their despairing moments some EU officials ask themselves.

(END) Dow Jones Newswires

October 23, 2016 15:14 ET (19:14 GMT)