PINCH yourself. Much that could have gone wrong in the euro zone suddenly seems to be going right. Germany’s constitutional court in Karlsruhe has given the go-ahead for a new rescue fund. A banking union is taking shape. The ever-awkward Dutch have swung back to pro-EU mainstream parties in this week’s election. This builds on a recent pledge from the European Central Bank (ECB) to act to stop the break-up of the currency. Even angry talk of expelling the Greeks from the euro has died down.

But don’t rejoice quite yet. The fine print of the Karlsruhe judgment may yet cause problems. Even Dutch centrists are wary of handing over cash and sovereignty. Nobody yet knows how to defuse the ticking bomb of Greece. The ECB’s commitment is untested. And nobody yet knows whether and when Spain will accept the offer of ECB help. Then there is the danger of complacency: debtor states might slow down reforms; creditors may lose the will to repair the euro’s fatal flaws.

Messily, perhaps, European leaders are at least debating some of the right questions: what degree of fiscal federalism and risk-sharing does the euro zone need to overcome the crisis? In his grandly named “state of the union” speech this week, José Manuel Barroso, president of the European Commission (the EU’s civil service), urged the euro zone to march towards a fully fledged “federation of nation-states”.

Others are using the F-word, too. Mario Draghi, the wily ECB president, thinks a full federation would “set the bar too high”. Yet Pierre Moscovici, the French finance minister, last week surprised many by speaking of federalism and floating an intriguing idea: a Europe-wide unemployment-insurance fund.

All this will feed into a process led by Mr Barroso, Mr Draghi and the presidents of two other European institutions—Herman Van Rompuy of the European Council and Jean-Claude Juncker of the Eurogroup of finance ministers—to draw up plans by the end of the year for a “genuine economic and monetary union”. In June they had already set out four “building blocks”: a banking union (to stabilise the banks), a fiscal union (leading to joint debt issuance), an economic union (to reform labour markets and boost competitiveness) and a political union (to give the whole thing more democratic legitimacy).

Most of these blocks are unlikely to take full shape—at least this side of the German election in the autumn of 2013. Take the banking union. The commission has proposed giving the ECB power to supervise all of Europe’s 6,000 banks, paving the way for the EU’s rescue funds to recapitalise troubled banks directly. But for now, each country will be left in charge of restructuring and winding down banks deemed insolvent by the ECB. And the commission has set aside the idea of a joint euro-zone deposit-insurance scheme because of German objections to pooling liabilities. Without such risk-sharing, though, much of the euro zone could be one bank run away from meltdown.

Fiscal union is even harder. Germany will not hear of joint Eurobonds. And France does not want to give Brussels more power to dictate national economic policies. This impasse, in turn, prevents progress on economic and political union. “There is an unholy alliance between those who refuse to share sovereignty and those who refuse to share risks,” complains one Eurocrat.

Yet a new idea is emerging: promoting what is called “fiscal capacity”, meaning a central euro-zone budget that could start to act as a counter-cyclical economic tool. The American federal budget accounts for some 24% of GDP; the Swiss one is roughly 12%. The EU budget, by contrast, amounts to just 1%. Mr Moscovici’s unemployment-insurance scheme (part of a fifth building block he calls “social union”) may create an automatic stabiliser: countries would receive money to help support the unemployed in bad times, and contribute in good times.

Would the Germans accept such a leap towards a “transfer union” they have always opposed? Many would worry that such a scheme would be a step towards the French Socialists’ long-held dream of harmonising minimum wages and welfare standards across the EU. Germany, by contrast, wants to make European labour markets more flexible and reform social-security systems.

And yet, Angela Merkel, the German chancellor, has privately said she is ready to consider bigger transfers. Her officials speak of giving more money to reformist countries, say, to help retrain jobless workers. Some Eurocrats think the French and German approaches can be reconciled. European unemployment insurance could be limited to topping up benefits for short-term jobless. Long-term unemployment would still be for national governments to finance. Costs should be limited (0.25% of GDP perhaps). Helping the jobless may be more palatable than bailing out feckless states. And it may soften Germany’s image as the heartless enforcer of austerity.

Get it right

The idea of unemployment benefits is far from accepted by the French or German governments, or even by EU institutions. But transfers of some kind may well come to pass. They would give President François Hollande something to show for his vague idea of intégration solidaire. And for Germany, transfers worth billions may be preferable to taking on the seemingly unlimited liability for debt and bank deposits across the euro zone.

By themselves transfers will not be large enough to end the crisis. Still, done right, they could send a signal of political unity and help make reforms more acceptable. Done wrong, though, they could harden labour-market sclerosis and create permanent dependence on German subsidies. The danger is that instead of fostering solidarity they could sharpen resentment and deepen the schism between debtors and creditors.

Economist.com/blogs/charlemagne