Europe is financially insane; even its most embattled members avoiding a dreaded ‘euro exit’ at all costs.Until politics takes a back seat to economics, recovery from the ongoing euro crisis will remain on hold.News of a future, centralised banking union — a ‘FED-alike’ institution to regulate and bailout European banks — is billed as a big step towards resolution of the seemingly never ending ‘euro crisis’ drama.Certainly, it’s a stabilising mechanism, with a calming effect evident in financial markets over recent days. Yet the inherent problem of the Eurozone — that many countries can’t afford to service debts at ‘old-fashioned’ interest rates — is yet to be addressed.Individuals like you or I don’t expect to get low-interest loans of, say, 2-3%. We expect to pay 5-10% on our borrowings.In the modern world of broke, so-called, ‘PIIGS’ (Portugal, Italy, Ireland, Greece and Spain) however, a 6% interest rate for governmental borrowings is viewed as too high.If I couldn’t afford to service my debts at 6% I would soon find myself in bankruptcy court.So I think it’s almost funny to hear European leaders claim they can no longer borrow at ‘reasonable’ rates — as if it’s a moral outrage that no one dares lend them money for practically nothing.If this complaint came from you or I, it would soon be pointed out to us that we should live within our means — we should be thinking about ways of repaying what we owe, rather than borrowing even more.These sort of thoughts don’t appear to have entered the collective ‘head’ of Europe. The region is now got to a place far, far away from financial sanity.And this is why the trouble is far from over.When there is one reality for the state — in this case financial probity — and another for its citizens, it amounts to a major stability problem. The more those two realities (state and citizen) diverge, the bigger the trouble in store.There is a giant “double bind” behind the whole crisis. To see it you must accept a certain number of basic premises:n Europe has a giant fiscal budget crisis and most members are insolvent.n The states cannot recover without restructuring.n The necessary restructuring involves either of two paths, Austerity or inflation, or both.Austerity means cuts to the work and entitlements available to the group responsible for the restructuring — as well as to masses of their voting supporters.Inflation means the destruction of the entitlements, and, most importantly, pensions of the group responsible for the restructuring and masses of their voting supporters.The result? Nothing much happens, as those responsible for restructuring cheat.This is why Germany is not agreeing to Eurobonds. Germany is afraid the measure will equate to putting itself ‘on the hook’ for the sake of other countries — i.e. taking responsibility for ‘the PIIGSs’ ‘ out-of- control spending.The bottom line is broke members of the Euro cannot leave the Euro, however much sense it may make, because that would destroy the very individuals responsible for taking that action.Euro-exit would relatively quickly rebalance a broke nation to where its economic equilibrium should be. This would be disastrous for many protected parts of that nation’s economy. The shift would devastate entitlements of the state sector and anyone dependent on the state.There would be dramatic, public sector retrenchment and likely dramatic change among the political classes. As such, a Euro exit means the end of the current state system for much of socialised Europe.It would be like a mini collapse of the Berlin Wall.This is why the obvious, ‘Euro exit’ solution has not been embraced by the very countries that most need it This is why, instead, countries under the worst stress will end up surrendering sovereignty instead rather than buckle to economic sense.Remember, turkeys do not vote for Christmas. So rather than bow to regional economic realities, Europe’s regions will sell themselves into a Federated Europe which the industrious north will control via Europe’s funding systems.From a political stand point a Federated Europe is a glorious victory for global peace — all for the price of a little economic discomfort.Europe will likely suffer a long period of continued brinkmanship punctuated by small bridging bailouts and partial solutions designed to curry favour with an angry and confused electorate while political unification is cemented.Any country in the euro needing funds but not prepared to federate will be expelled. However, it is unlikely that any will refuse. As such, the euro crisis will last however long it takes to federate. This will probably be another 2 years.There is really only one thing that could go wrong.Germany could refuse to foot the bill for this grand plan. It is a huge tariff even if it is a historic one.If the German populace cottoned on and felt it shouldn’t foot the bill for a Federal Europe then all bets would be off. Germany would then leave the euro and the currency would fall like a stone and likely collapse.The most likely outcome is, however, more pain and instability, no Euro exits and two years more of headlines and hard times.By then, there could even have been enough slow adjustment to produce a platform for growth. Yet until there is a public/private sector rebalancing across the board, the story will develop at the political level, rather than at an economic one.Sadly, until we can leave politics behind and let economics drive the process, recovery will be on hold.Clem Chambers is the CEO of leading stocks and shares site www.ADVFN.com.