Mr Papandreou was instructed to approve the last European bail-out deal or risk losing his loans and being ejected from the euro. He scrapped his call for a referendum, and agreed on November 6th to make way for a government of national unity. With Italy’s bond yields reaching danger levels, Mr Berlusconi was told he lacked credibility and was made to “invite” the IMF to supervise his reforms. On November 8th, though, Mr Berlusconi lost his majority in parliament, and agreed to step down once the reforms are passed.
Two taboos were broken in Cannes. It was the first time euro-zone leaders accepted that a member could default and leave the euro. (And once the unthinkable is possible, why stop at Greece?) It was also the first time leaders intruded so deliberately into the internal politics of other countries.
True, the European Union has long influenced national politics. Think of how Conservative divisions over Europe contributed to the resignation of Britain’s Margaret Thatcher in 1990, or how new members have transformed themselves to join the EU, or how Italy reformed its public finances to qualify for the euro in 1999. In the past year the crisis has brought down the prime ministers of Ireland and Portugal after they needed to be bailed out.
Yet something has changed. Europeans see themselves as a family; they have rows, but nobody questions a member’s right to be part of the clan. But at Cannes euro-zone leaders made plain that family members could be forsaken, even disinherited. Some see this as an assault on national democracies by the European elite, be it unelected or self-appointed (as in the case of the German-French duo of “Merkozy”, Angela Merkel and Nicolas Sarkozy). Much has been written about the subjugation of Greece, the cradle of democracy, under a second German occupation.
And much of it is nonsense. Italy and Greece chose freely to join the euro, and every club has norms of behaviour. In a monetary union, irresponsibility by one member endangers the well-being of others. If Italy and Greece had not been so over-indebted and sclerotic, they would not be in such trouble today. Countries that extend financial help have a right to impose conditions to ensure that their loans are repaid. The alternative to euro-zone diktat is being abandoned to the market. And if a response is needed, it will inevitably be led by Germany and France.
Yet there is something to the critics’ charges. For many countries, such as Spain, the EU has been an anchor of democracy. But as the crisis persists, austerity drags on and the euro zone integrates to save itself, the legitimacy of the enterprise will suffer. The pain would be more acceptable if the creditors acted as if they believed they faced an existential threat. But rather than commit their full resources to the crisis, they are seeking to limit their liability. This raises a sense of double standards: one kind of democracy for creditors, another for debtors. Everybody must understand the constraints on Mrs Merkel. But Mr Papandreou commits a “breach of trust” if he calls a referendum.
The debtors, moreover, bear the cost of the creditors’ mistakes. In Greece the IMF (rightly) wanted the adjustment programme to focus more on growth-promoting structural reforms; the Europeans prioritised deficit-reduction. A deeper-than-forecast recession means Greece must chase ever-receding fiscal targets with ever more austerity. Its first bail-out gave it three-year loans at punitive interest rates, with no debt reduction. The latest rescue offers Greece cheap rates for up to 30 years, with a 50% haircut on private bondholders. At least one of these options was wrong, and neither may be enough to save Greece. Germany belatedly accepted the need for the rescue fund to be larger and more flexible. Had all this been done sooner, the crisis might have been contained more easily, and at lower cost.
First fight the fire
Right now the emphasis needs to be on firefighting. Italy is burning, and the rest of the euro area could be consumed with it. Decisions cannot be hostage to the vicissitudes of 17 national parliaments. And Germany restraining the European Central Bank is like insisting that water buckets are used instead of fire engines.
In the longer term, though, the euro zone will need a new fire code. The EU’s treaties are likely to be reopened, again. Euro members will have to abide by stricter fiscal rules and accept intrusive inspection by outsiders. The loss of sovereignty would be more acceptable to debtors if the creditors were to accept the need, eventually, to issue joint Eurobonds.
Independent institutions are needed to make the system work. Most would prefer the unelected European Commission over an intergovernmental body dominated by Merkozy. The commission, moreover, would act as a vital link between the 17 euro “ins” and the ten non-euro “outs”, preventing the sort of two-speed Europe now openly advocated by France. More Europe should not mean more Sarkozy and less single market.
Saving the euro requires more pain for some, more generosity from others and fundamental change for all. Is it worth it? Sooner or later, citizens must be asked. Without their support, no reform can last. And a real choice must include the option of leaving the euro. Now that this taboo has been breached, the euro zone should start thinking about how best to arrange the departure of those that cannot, or will not, live by Germanic rules.
http://www.economist.com/node/21538204
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